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MarketScreener Homepage  >  Equities  >  Nasdaq  >  StoneX Group Inc.    SNEX

STONEX GROUP INC.

(SNEX)
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INTL FCSTONE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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05/07/2020 | 06:11am EDT
Throughout this document, unless the context otherwise requires, the terms
"Company", "we", "us" and "our" refer to INTL FCStone Inc. and its consolidated
subsidiaries. INTL FCStone Inc. is a Delaware corporation.
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and notes thereto appearing
elsewhere in this report. This Quarterly Report on Form 10-Q contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements involve known and unknown risks and uncertainties,
many of which are beyond the control of INTL FCStone Inc. and its subsidiaries,
including adverse changes in economic, political and market conditions, losses
from our market-making and trading activities arising from counterparty failures
and changes in market conditions, the possible loss of key personnel, the impact
of increasing competition, the impact of changes in government regulation, the
possibility of liabilities arising from violations of foreign, U.S. federal and
U.S. state securities laws, the impact of changes in technology in the
securities and commodities trading industries and the potential impact of
the COVID-19 pandemic on our business, operations, results of operations,
financial condition, workforce or the operations or decisions of our customers,
suppliers or business customers. Although we believe that our forward-looking
statements are based upon reasonable assumptions regarding our business and
future market conditions, there can be no assurances that our actual results
will not differ materially from any results expressed or implied by our
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. We caution readers that any forward-looking
statements are not guarantees of future performance.
Overview
We are a global brokerage and financial services firm providing execution, risk
management and advisory services, market intelligence and clearing post-trade
services across asset classes and markets around the world. We provide these
services to a diverse group of more than 30,000 commercial and institutional
clients and over 125,000 retail clients located in more than 130 countries. We
help our clients to access market liquidity, maximize profits and manage risk.
Our operating revenues are derived primarily from financial products and
advisory services intended to fulfill our clients' commercial needs and provide
bottom-line benefits to their businesses. Our businesses are supported by our
global infrastructure of regulated operating subsidiaries, our advanced
technology platform and our team of more than 2,100 employees as of March 31,
2020. We believe our client-first approach differentiates us from large banking
institutions, engenders trust and has enabled us to establish leadership
positions in a number of complex fields in financial markets around the world.
We report our operating segments based on services provided to clients. Our
business activities are managed as operating segments and organized into five
reportable segments, including Commercial Hedging and Physical Commodities,
which are commercial client focused; Clearing and Execution Services ("CES") and
Securities, which are institutional client focused; and Global Payments. See
Segment Information for a listing of our operating segment components.
COVID Impact
During the second quarter of fiscal 2020, worldwide social and economic activity
became severely impacted by the spread and threat of coronavirus ("COVID-19").
In March 2020, COVID-19 was recognized as a global pandemic and has spread to
many regions of the world, and all countries in which we have operations. The
response by governments and societies to the COVID-19 pandemic, which has
included temporary closures of businesses; social distancing; travel
restrictions, "shelter in place" and other governmental regulations, has
significantly impacted market volatility and general economic conditions. We are
closely tracking the evolving impact of COVID-19 and are focused on helping our
customers and employees through these difficult times.
Current Results of Operations
The COVID-19 pandemic has resulted in unprecedented market conditions and
significant volatility in the markets. Our second quarter results reflect strong
revenue growth in Equity and Debt Capital Markets primarily related to increased
customer flow to our equity market making desk and a widening of spreads in
fixed income dealer as a result of periods of high volatility in the global
markets as a result of economic concerns related to the COVID-19 pandemic. We
have also seen a growth in operating revenues driven by increased customer
activity in Exchange-Traded Futures & Options and FX Prime Brokerage businesses,
as well as a significant increase in customer demand for precious metals in
light of the COVID-19 global pandemic and the resulting effect on the global
economy.
Impact on Current Balance Sheet and Liquidity
We currently have a strong balance sheet and liquidity profile. In addition to
our cash and cash equivalents as of March 31, 2020, we had $96.5 million of
committed funds available under our credit facility for general working capital
requirements. We

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believe we have sufficient liquidity and have preserved financial flexibility in
light of current uncertainty in the global markets resulting from the COVID-19
pandemic.
Impact on Customers
Our top priority is to service and care for our current customers. During this
period of time, we have worked to prudently manage or reduce market risk
exposure to these highly volatile markets.
Employees
We have taken actions to minimize risk to our employees, including restricting
travel and providing secure and efficient remote work options for our team
members. This leveraged our existing operational contingency plans at every
level of the organization which ensured business process and control continuity.
These actions have helped prevent major disruption to our clients and
operations.
Business Continuity plans
We deployed business continuity plans to ensure operational flexibility through
any environment, including the ability to work remotely. We continue to serve
our customers while maintaining social distancing and other safety protocols to
keep our employees and customers safe.
The full extent to which the COVID-19 pandemic will impact our business and
operating results will depend on future developments that are highly uncertain
and cannot be accurately predicted, including new information that may emerge
concerning COVID-19 and the mitigation efforts by government entities, as well
as our own immediate COVID-19 operational response. We have and will continue to
take active and decisive steps in this time of uncertainty and remain committed
to the safety of our employees, while also continuing to serve our customers.
Recent Volatility in Crude Oil Markets
On April 20, 2020, the price of the main U.S. oil benchmark declined sharply,
entering negative territory for the first time ever as the significant decline
in global demand for crude oil stressed the global storage capacity for this
commodity. Volatility in global markets, such as crude oil noted above, can
cause client account deficits to occur from time to time. Currently, we do not
believe that this market event has an impact on our ability to comply with our
ongoing liquidity, capital, and regulatory requirements.
OptionSellers
During the week ended November 16, 2018, balances in approximately 300 accounts
of the futures commission merchant ("FCM") division of our wholly owned
subsidiary, INTL FCStone Financial Inc. ("INTL FCStone Financial"), declined
below required maintenance margin levels, primarily as a result of significant
and unexpected price fluctuations in the natural gas markets. All positions in
these accounts, which were managed by OptionSellers.com Inc. ("OptionSellers"),
an independent Commodity Trading Advisor ("CTA"), were liquidated in accordance
with the INTL FCStone Financial's client agreements and obligations under market
regulation standards.
A CTA is registered with the U.S. Commodity Futures Trading Commission ("CFTC")
and a member of, and subject to audit by, the National Futures Association
("NFA"). OptionSellers is registered under a CFTC Rule 4.7 exemption for
"qualified eligible persons," which requires the account holders authorizing
OptionSellers to act as their CTA to meet or exceed certain minimum financial
requirements. OptionSellers, in its role as a CTA, had been granted by each of
its clients full discretionary authority to manage the trading in the client
accounts, while INTL FCStone Financial acted solely as the clearing firm in its
role as the FCM.
INTL FCStone Financial's client agreements hold account holders liable for all
losses in their accounts and obligate the account holders to reimburse INTL
FCStone Financial for any account deficits in their accounts. As of March 31,
2020, the aggregate receivable from these client accounts, net of collections
and other allowable deductions, was $29.0 million, with no individual account
receivable exceeding $1.4 million. INTL FCStone Financial continues to pursue
collection of these receivables and intends both to enforce and to defend its
rights aggressively, and to claim interest and costs of collection where
applicable.
We have completed an assessment of the collectability of these accounts and have
concluded that we do not have a sufficient basis to record an allowance against
these uncollected balances. Our assessment has included the consideration of the
status of numerous arbitration proceedings we have initiated against clients to
recover deficit balances in their accounts. We believe we have a valid claim
against these clients, based on the express language of the client contracts and
legal precedent, and intend to pursue collection of these claims vigorously. As
we move through the collection and arbitration processes and additional
information becomes available, we will continue to consider the need for an
allowance against the carrying value of these uncollected balances.

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Additionally, we have been named in arbitrations brought by clients seeking
damages relating to the trading losses in these accounts. We believe that such
cases are without merit and intend to defend them vigorously. The ultimate
outcome of these arbitrations cannot be presently determined, however we believe
the likelihood of a material adverse outcome is remote.
Depending on future collections and arbitration proceedings, any provisions for
bad debts and actual losses ultimately may or may not be material to our
financial results. Currently, we do not believe that any potential losses
related to this matter would impact our ability to comply with our ongoing
liquidity, capital, and regulatory requirements.
Executive Summary
The second quarter of fiscal 2020 was a period in which we saw significant
volatility in nearly all of the global markets our clients transact in related
to the economic effect of COVID-19, which resulted in a record $366.8 million of
operating revenues for the quarter, as we added $95.7 million, or 35%, compared
to the prior year.
The growth in operating revenues was led by our Securities segment which added
$45.3 million versus the prior year, while Clearing and Execution Services and
Commercial Hedging added $22.9 million and $21.1 million, respectively. Physical
Commodities added $4.2 million and Global Payments added $2.0 million in
operating revenues compared to the prior year.
Overall, segment income increased $40.1 million or 52% compared to the prior
year to $117.3 million in the second quarter. Securities segment income
increased $26.6 million or 225%, versus the prior year, as Equity Capital
Markets saw volumes increase 134% and Debt Capital Markets saw spreads widen
59%, adding $17.0 million and $9.6 million in segment income, respectively
compared to the prior year.
Commercial Hedging segment income increased 19%, to $35.8 million, primarily as
a result of increases in both exchange-traded, up 22% and over-the-counter
("OTC") transactional revenues, up 46% as compared to the prior year. These
gains were tempered by a $2.3 million decline in interest income due to the
decline in short term rates and a $3.2 million increase in bad debt expense.
CES segment income increased 41%, or $4.7 million versus the prior year
primarily as a result of $2.7 million and $2.1 million increases in our
Exchange-Traded Futures & Options and FX Prime Brokerage businesses,
respectively. Independent Wealth Management added $0.8 million in segment
income, while Correspondent Clearing and Derivative Voice Brokerage saw $0.7
million and $0.2 million declines in segment income as compared to the prior
year period. Declines in short terms interest rates weighed modestly on segment
results in these business, driving declines in interest income of $2.4 million
as well as a $0.6 million decline in fee income related to money market/FDIC
sweep balances compared to the prior year period.
Global Payments segment income increased $1.4 million or 9% compared to the
prior year, primarily as a result of the increase in operating revenues which
was partially offset by higher fixed compensation and benefits.
Physical Commodities segment income increased $1.8 million to $9.6 million in
the second quarter versus the prior year. This was primarily driven by a $0.8
million increase in Precious Metals segment income as well as a $1.0 million
increase in segment income in our Physical Ag & Energy business.
On the expense side, we continue to focus on maintaining our variable cost model
and limiting the growth of our non-variable expenses. To that end, variable
expenses were 63% of total expenses in the current period compared to 57% in the
prior year period. Non-variable expenses, excluding bad debts increased $12.7
million, or 14%, period-over-period, primarily related to new acquisitions and
new business initiatives began since March 2019.
For the second quarter of fiscal 2020, we recorded net income of $39.3 million
compared to $23.4 million in the prior year period.

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Selected Summary Financial Information
Results of Operations
Total revenues reported combine gross revenues for the physical commodities
business and net revenues for all other businesses. In order to reflect the way
that we view the results, the table below reflects the calculation of the
subtotal 'operating revenues', which is calculated by deducting cost of sales of
physical commodities from total revenues. Set forth below is our discussion of
the results of our operations, as viewed by management, for the six month period
ended March 31, 2020 and 2019.
                       Financial Information (Unaudited)
                                  Three Months Ended March 31,                      Six Months Ended March 31,
(in millions)                    2020         % Change       2019              2020           % Change          2019
Revenues:
Sales of physical
commodities                $   20,016.9          189  %   $ 6,929.5$       30,994.9         134  %   $      13,225.3
Principal gains, net              168.5           53  %       110.3                281.0          38  %             203.1
Commission and clearing
fees                              116.6           37  %        85.1                203.8          10  %             184.6
Consulting, management,
and account fees                   22.6           18  %        19.1                 43.9          15  %              38.2
Interest income                    41.7          (13 )%        48.2                 87.7          (6 )%              93.2
Total revenues                 20,366.3          183  %     7,192.2             31,611.3         130  %          13,744.4
Cost of sales of physical
commodities                    19,999.5          189  %     6,921.1             30,967.7         134  %          13,208.6
Operating revenues                366.8           35  %       271.1                643.6          20  %             535.8
Transaction-based clearing
expenses                           63.8           49  %        42.7                110.1          19  %              92.8
Introducing broker
commissions                        29.6           19  %        24.8                 55.8          (3 )%              57.4
Interest expense                   30.0          (22 )%        38.4                 63.8         (11 )%              71.4
Net operating revenues            243.4           47  %       165.2                413.9          32  %             314.2
Compensation and benefits         136.7           40  %        97.9                240.7          29  %             187.0
Bad debts                           4.4          529  %         0.7                  4.4         340  %               1.0
Recovery of bad debt on
physical coal                         -            -              -                    -        (100 )%              (2.4 )
Other expenses                     46.2           12  %        41.1                 91.1          16  %              78.7
Total compensation and
other expenses                    187.3           34  %       139.7                336.2          27  %             264.3
Other gain                            -         (100 )%         5.4                  0.1         (98 )%               5.4
Income before tax                  56.1           82  %        30.9                 77.8          41  %              55.3
Income tax expense                 16.8          124  %         7.5                 22.2          62  %              13.7
Net income                 $       39.3           68  %   $    23.4     $           55.6          34  %   $          41.6

Balance Sheet information:                                                March 31, 2020      % Change     March 31, 2019
Total assets                                                            $       10,870.9          16  %   $       9,407.7
Payables to lenders under
loans                                                                   $          275.0           7  %   $         256.8
Senior secured tern loan,
net                                                                     $          184.3           7  %   $         171.8
Stockholders' equity                                                    $          648.6          18  %   $         551.8



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The selected data table below reflects key operating metrics used by management in evaluating our product lines, for the periods indicated:

                                        Three Months Ended March 31,                   Six Months Ended March 31,
                                      2020          % Change        2019           2020         % Change        2019
Volumes and Other Data:
Exchange-traded - futures and
options (contracts, 000's)            47,611.4        64  %       29,060.3        81,671.9        23  %        66,587.4
OTC (contracts, 000's)                   609.5        59  %          383.5         1,098.5        39  %           792.8
Global Payments (# of payments,
000's)                                   203.9        25  %          162.8           398.1        21  %           329.4
Gold equivalent ounces traded
(000's)                              121,618.2        56  %       77,721.1       228,833.7        32  %       172,940.7
Equity Capital Markets (gross
dollar volume, millions)         $    86,953.2       134  %     $ 37,238.8$ 126,884.2        58  %     $  80,547.5Debt Capital Markets (gross
dollar volume, millions)         $    51,612.0       (11 )%     $ 58,230.1$  91,815.7       (23 )%     $ 118,907.3
FX Prime Brokerage volume (U.S.
notional, millions)              $   129,998.7        62  %     $ 80,435.6$ 204,350.3        20  %     $ 170,380.3
Average assets under management
in Argentina (U.S. dollar,
millions)                        $       331.3        (5 )%     $    347.3$     306.5        (3 )%     $     315.0
Average client equity - futures
and options (millions)           $     2,444.8        26  %     $  1,936.6$   2,351.0        10  %     $   2,134.6
Average money market / FDIC
sweep client balances (millions) $       956.9        24  %     $    772.5

$ 969.2 26 % $ 772.1



Operating Revenues
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Operating revenues increased 35% to a record $366.8 million in the second
quarter compared to $271.1 million in the prior year. The growth in operating
revenues was led by our Securities and Clearing and Execution Services segments
which added $45.3 million and $22.9 million, respectively versus the prior year.
The Commercial Hedging segment also had a strong quarter, adding $21.1 million
in operating revenue as compared to the prior year. In addition, our Physical
Commodities segment added $4.2 million in operating revenues, while Global
Payments increased operating revenues by $2.0 million versus the prior year.
Operating revenues in our Securities segment increased 62% compared to the prior
year to a record $117.9 million in the second quarter. Both the Equity and Debt
Capital Markets saw strong operating revenue growth, adding $30.4 million and
$14.4 million, respectively as compared to the prior year. In both cases, this
growth was driven by periods of high volatility in both the global equity and
fixed income markets, particularly in March 2020, driven by the result of
economic concerns related to the COVID-19 pandemic. Equity Capital Markets saw a
134% increase in the gross dollar volume traded and a 6% decline in the revenue
per $1,000 traded while the Debt Capital Markets saw a 11% decline in the
principal dollar volume traded but a 59% increase in the revenue per $1,000
traded. Asset Management operating revenues declined $0.5 million compared to
the prior year period.
Operating revenues in our CES segment increased 31% to $96.5 million in the
second quarter, primarily as a result of 43% increase in Exchange-Traded Futures
& Options revenues to $50.6 million, driven by a 71% increase in contract
volumes which was partially offset by a 5% decline in the average rate per
contract. This increase was partially offset by a $2.0 million decline in
interest income. In addition, FX Prime Brokerage operating revenues increased
$4.4 million as compared to the prior year, with volumes increasing 62% as
compared to the prior year period. Both the increase in Exchange Traded Futures
& Options and FX Prime Brokerage operating revenues were driven by COVID-19
related market volatility. Operating revenues in our Correspondent Clearing
business declined $0.4 million as compared to the prior year, to $8.0 million
while our Independent Wealth Management business added $5.3 million in operating
revenue to 23.2 million in the second quarter. Operating revenues in Derivative
Voice Brokerage declined $1.7 million versus the prior year period.
Operating revenues in Commercial Hedging increased 26% compared to the prior
year to a record $101.7 million as a result of a $8.7 million increase in
exchange-traded transactional revenues as well as a $14.1 million increase in
OTC revenues versus the prior year. Exchange-traded volumes and OTC volumes
increased 37% and 59%, respectively driven by increased market volatility, and
the average client equity increased 3% to $943.6 million.
Operating revenues in our Physical Commodity segment increased 21% to $24.0
million. This increase was driven by a $2.8 million increase in Precious Metals
operating revenues, as the number of gold equivalent ounces traded increased 56%
versus the prior year while the average revenue per ounce traded declined 20%.
Operating revenues in our Physical Ag & Energy business increased $1.4 million
versus the prior year, primarily driven by an increase in activity in our
biodiesel feedstock activities.
Operating revenues in our Global Payments segment increased 7% in the second
quarter to $29.4 million, as a result of a 25% increase in the number of global
payments while the average revenue per trade declined 15% compared to the prior
year.

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See Segment Information below for additional information on activity in each of
the segments.
Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
Operating revenues increased 20% to $643.6 million in the current six months
ended compared to $535.8 million in the prior year. All segments of our business
achieved growth in operating revenues versus the prior year, led by our
Securities and Commercial Hedging segments, which added $57.4 million and $31.0
million, respectively versus the prior year period. In addition, our Physical
Commodities segment added $10.0 million, while Global Payments and Clearing and
Execution Services added $3.7 million and $3.6 million, respectively versus the
prior year.
Operating revenues in our Securities segment increased 41% to $199.0 million in
the current six months ended compared to the prior year. The Equity Capital
Markets business increased 39%, to $103.5 million, as the gross dollar volume
traded increased 58% as a result of increased market volatility and market
share. Operating revenues in our Debt Capital Markets business increased 45%, to
$91.9 million versus the prior year, driven by an 89% increase in the revenue
per $1,000 traded as compared to the prior year. Both the Equity and Debt
Capital Markets performance benefited from periods of high volatility,
particularly in the second quarter of fiscal 2020 related to COVID-19. Asset
Management operating revenues declined 5%, to $3.6 million in the current six
months ended, as the average assets under management in Argentina declined 3%.
Operating revenues in Commercial Hedging increased 22% to $171.4 million in the
current six months ended. Exchange-traded revenues increased $9.4 million as a
results of a 21% increase in exchange-traded volumes, while a 39% increase in
OTC volumes drove a $25.1 million increase in OTC revenues as compared to the
prior year. Interest income declined $4.2 million versus the prior year as a
result of a decline in short term interest rates and a 4% decline in average
client equity.
Our Physical Commodities segment operating revenues increased 29% to $44.1
million in the current six months ended, as a result of a $7.5 million increase
in Precious Metals operating revenues driven by increased customer demand as of
result of the COVID-19 pandemic and the acquisition of CoinInvest GmbH and
European Precious Metal Trading GmbH in the third quarter of fiscal 2019, In
addition, Physical Ag & Energy operating revenues increased $2.5 million as
compared to the prior year period.
Global payment segment operating revenues increased 6%, to 60.8 million in the
current six months ended, as a result of a 21% increase in the number of
payments made as compared to the prior year, while the average revenue per
payment declined 12% as compared to the prior year.
Operating revenues in our CES segment increased 2% to $172.4 million in the
current six months ended compared to the prior year. Exchange-Traded Futures &
Options operating revenues increased 3% versus the prior year to $88.5 million,
as exchange-traded volumes increased 23% versus the prior year period, however
the average rate per contract declined 11%. In addition, interest income
declined $4.2 million versus the prior year, despite a 22% increase in the
average client equity, due to the decline in short term interest rates. Our FX
Prime Brokerage business added $1.9 million in operating revenues versus the
prior year as a result of a 20% increase in foreign exchange volumes. The prior
year period includes a $2.7 million settlement received related to the Barclays
PLC 'last look' class action matter. Correspondent Clearing operating revenues
declined $0.3 million versus the prior year, while Independent Wealth Management
businesses added $5.3 million in operating revenues. Operating revenues in our
Derivative Voice Brokerage business declined $6.1 million as compared to the
prior year.
See Segment Information below for additional information on activity in each of
the segments.
Interest and Transactional Expenses
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Transaction-based clearing expenses: Transaction-based clearing expenses
increased 49% to $63.8 million in the second quarter compared to $42.7 million
in the prior year, and were 17% of operating revenues in the second quarter
compared to 16% in the prior year. The increase in expense is primarily related
to higher volumes within Exchange-Traded Futures & Options and increased ADR
conversion fees and clearing fees within Equity Capital Markets. Additionally,
higher volumes in Financial Ag & Energy and higher notional FX prime brokerage
led to higher costs.
Introducing broker commissions: Introducing broker commissions increased 19% to
$29.6 million in the second quarter compared to $24.8 million in the prior year,
and were 8% of operating revenues in the second quarter compared to 9% in the
prior year. The increase in expense is primarily seen within Independent Wealth
Management, Financial Ag & Energy, and Exchange-Traded Futures & Options as a
result of higher revenues.
Interest expense: Interest expense decreased $8.4 million, or 22%, to $30.0
million in the second quarter compared to $38.4 million in the prior year.
During the second quarter and the prior year, interest expense directly
attributable to trading activities, interest expense on short-term financing
facilities of subsidiaries and other direct interest expense of operating
segments was $27.8 million and

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$35.2 million, respectively. During the second quarter, interest expense
directly attributable to trading activities conducted as an institutional dealer
in fixed income securities was $12.7 million compared to $17.5 million in the
prior year. During the second quarter, interest expense directly attributable to
securities lending activities were $7.5 million compared to $9.8 million in the
prior year. During the second quarter, interest expense on short-term financing
facilities of subsidiaries and other direct interest expense of operating
segments was $7.6 million compared to $7.9 million, resulting primarily from the
decrease in short-term interest rates.
During the second quarter and the prior year, interest expense related to
corporate funding purposes was $2.2 million and $3.2 million, respectively, due
to lower current short term interest rates.
Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
Transaction-based clearing expenses: Transaction-based clearing expenses
increased 19% to $110.1 million in the current six months ended compared to
$92.8 million in the prior year, and were 17% of operating revenues in the
current six months ended compared to 17% in the prior year. The increase in
expense is primarily resulting from higher volumes within Exchange-Traded
Futures & Options and higher exchange fees, partially offset by lower ADR
conversion fees, within Equity Capital Markets. Additionally, higher volumes
within Financial Ag & Energy and LME Metal resulted in higher expenses.
Introducing broker commissions: Introducing broker commissions decreased 3% to
$55.8 million in the current six months ended compared to $57.4 million in the
prior year, and were 9% of operating revenues in the current six months ended
compared to 11% in the prior year. The decrease in the percentage of introducing
broker commissions as a percentage of operating revenues is primarily a result
of the overall growth in operating revenues that do not have related introducing
broker payouts. The decrease in expense is primarily due to decreased activity
in Exchange-Traded Futures & Options, partially offset by expense increases in
Independent Wealth Management and Financial Ag & Energy as a result of higher
revenues.
Interest expense: Interest expense decreased $7.6 million, or 11%, to $63.8
million in the current six months ended compared to $71.4 million in the prior
year.
During the current six months ended and the prior year, interest expense
directly attributable to trading activities, interest expense on short-term
financing facilities of subsidiaries and other direct interest expense of
operating segments was $58.9 million and $65.4 million, respectively. During the
current six months ended, interest expense directly attributable to trading
activities conducted as an institutional dealer in fixed income securities was
$28.4 million compared to $34.8 million in the prior year. During the current
six months ended, interest expense directly attributable to securities lending
activities were $16.3 million compared to $14.5 million in the prior year.
During the current six months ended, interest expense on short-term financing
facilities of subsidiaries and other direct interest expense of operating
segments was $14.2 million compared to $16.1 million, resulting primarily from
the decrease in short-term interest rates along with lower average borrowings
outstanding on our physical commodities financing facilities.
During the current six months ended and the prior year, interest expense related
to corporate funding purposes was $4.9 million and $6.0 million, respectively,
due to lower current short term interest rates.
Net Operating Revenues
Net operating revenues is one of the key measures used by management to assess
the performance of our operating segments. Net operating revenue is calculated
as operating revenue less transaction-based clearing expenses, introducing
broker commissions and interest expense. Transaction-based clearing expenses
represent variable expenses paid to executing brokers, exchanges, clearing
organizations and banks in relation to our transactional volumes. Introducing
broker commissions include commission paid to non-employee third parties that
have introduced clients to us. Net operating revenues represent revenues
available to pay variable compensation to risk management consultants and
traders and direct non-variable expenses, as well as variable and non-variable
expenses of operational and administrative employees, including our executive
management team.
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Net operating revenues increased 47% to $243.4 million in the second quarter
compared to $165.2 million in the prior year.
Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
Net operating revenues increased 32% to $413.9 million in the current six months
ended compared to $314.2 million in the prior year.

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Compensation and Other Expenses The following table shows a summary of expenses, other than interest and transactional expenses.

                                  Three Months Ended March 31,                   Six Months Ended March 31,
(in millions)                   2020          % Change        2019            2020            % Change        2019
Compensation and benefits:
Variable compensation and
benefits                    $      82.6          61  %     $   51.4$    137.2               38  %     $   99.1
Fixed compensation and
benefits                           54.1          16  %         46.5          103.5               18  %         87.9
                                  136.7          40  %         97.9          240.7               29  %        187.0
Other expenses:
Trading systems and market
information                        11.2          18  %          9.5           21.6               16  %         18.7
Occupancy and equipment
rental                              4.9          (2 )%          5.0            9.9                5  %          9.4
Professional fees                   4.7          (6 )%          5.0           10.7                4  %         10.3
Travel and business
development                         3.2         (20 )%          4.0            7.7               (1 )%          7.8
Non-trading technology and
support                             5.9          18  %          5.0           11.9               29  %          9.2
Depreciation and
amortization                        4.2          31  %          3.2            8.1               33  %          6.1
Communications                      1.5         (25 )%          2.0            3.1               (6 )%          3.3
Bad debts                           4.4         529  %          0.7            4.4              340  %          1.0
Recovery of bad debt on
physical coal                         -         n/m               -              -              n/m            (2.4 )
Other                              10.6          43  %          7.4           18.1               30  %         13.9
                                   50.6          21  %         41.8           95.5               24  %         77.3
Total compensation and
other expenses              $     187.3          34  %     $  139.7$    336.2               27  %     $  264.3


Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Compensation and Other Expenses: Compensation and other expenses increased $47.6
million, or 34%, to $187.3 million in the second quarter compared to $139.7
million in the prior year. Compensation and other expenses related to
acquisitions closed and new business initiatives began since March 2019 added
$5.1 million in the second quarter.
Compensation and Benefits: Total compensation and benefits expense increased
$38.8 million, or 40% to $136.7 million in the second quarter compared to $97.9
million in the prior year. Total compensation and benefits were 37% of operating
revenues in the second quarter compared to 36% in the prior year. The variable
portion of compensation and benefits increased by $31.2 million, or 61%, to
$82.6 million in the second quarter compared to $51.4 million in the prior year.
Variable compensation and benefits were 34% of net operating revenues in the
second quarter compared to 31% in the prior year. The primary driver of the
increase in variable compensation is the increased front office variable
incentive of $27.7 million. Additionally, administrative, centralized and local
operations and executive incentive compensation increased $3.5 million to $11.0
million in the second quarter compared to $7.5 million in the prior year.
The fixed portion of compensation and benefits increased $7.6 million, or 16% to
$54.1 million in the second quarter compared to $46.5 million in the prior year.
Non-variable salaries increased $5.8 million, or 18%, primarily due to our
recent acquisitions and new business initiatives, which added $1.3 million in
the second quarter. Employee benefits, excluding share-based compensation,
increased $1.6 million in the second quarter, primarily related to higher
payroll, healthcare and retirement costs from the increased headcount.
Share-based compensation is a component of the fixed portion, and includes stock
option and restricted stock expense. Share-based compensation was $2.4 million
in the second quarter compared to $1.9 million in the prior year. The number of
employees increased 3% to 2,151 at the end of the second quarter compared to
2,091 at the beginning of the second quarter. The number of employees at the end
of the prior year period was 1,851.
Other Expenses: Other non-compensation expenses increased $8.8 million, or 21%
to $50.6 million in the second quarter compared to $41.8 million in the prior
year. Other non-compensation expenses related to acquisitions closed and new
business initiatives began after March 2019 added $1.8 million in the second
quarter.
Trading systems and market information increased $1.7 million, of which $0.7
million was related to incremental costs from recent acquisitions and new
business initiatives. Professional fees decreased $0.3 million, primarily
related to insurance reimbursement for certain legal defense, partially offset
by higher legal fees associated with ongoing merger and acquisition activity.
Non-trading technology and support increased $0.9 million, primarily due to
higher external data center services and non-trading software as a service
arrangements related to various IT, client engagement, accounting and human
resources systems. Depreciation and amortization increased $1.0 million,
primarily related to an increase in IT hardware and software, and intangibles
associated with recent acquisitions. Other expense increased primarily related
to our jointly held internal bi-annual global sales meeting and customer Global
Markets Outlook Conference held during February 2020.

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Bad debts increased $3.7 million over the prior year. During the second quarter,
bad debts were $4.4 million, primarily related to $3.9 million of OTC client
account deficits in the Commercial Hedging segment, $0.3 million of client
deficits in the Clearing & Execution Services segment and $0.2 million in
uncollected receivables in the Physical Commodities segment. During the prior
year, bad debt expense was $0.7 million and primarily related to customer
deficits in Financial Ag & Energy.
Provision for Taxes: The effective income tax rate was 30% in the second quarter
compared to 24% in the prior year. For the three months ended March 31, 2020 and
2019, the effective rate was higher than the U.S. federal statutory rate of 21%
due to U.S. state and local taxes, global intangible low taxed income ("GILTI"),
U.S. and foreign permanent differences, and the amount of foreign earnings taxed
at higher tax rates. Income earned in the U.S. and in foreign jurisdictions
increased significantly in the three months ended March 31, 2020 compared both
to the prior quarter and the prior year. The effective tax rate increased 0.6%
due to state and local taxes on higher U.S. income compared to the prior
quarter. Non-deductible compensation due to Sec. 162(m) limitations increased
the effective tax rate by 0.4% as compared to the prior quarter. The amount of
foreign earnings taxed at higher tax rates increased by 0.7% from the prior
quarter.
Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
Compensation and Other Expenses: Compensation and other expenses increased $71.9
million, or 27%, to $336.2 million in the current six months ended compared to
$264.3 million in the prior year. Compensation and other expenses related to
acquisitions closed and new business initiatives began after September 2018
added $18.4 million in the current six months ended.
Compensation and Benefits: Total compensation and benefits expense increased
$53.7 million, or 29% to $240.7 million in the current six months ended compared
to $187.0 million in the prior year. Total compensation and benefits were 37% of
operating revenues in the current six months ended compared to 35% in the prior
year. The variable portion of compensation and benefits increased $38.1 million,
or 38%, to $137.2 million in the current six months ended compared to $99.1
million in the prior year. Variable compensation and benefits were 33% of net
operating revenues in the current six months ended compared to 32% in the prior
year. The primary driver of the increase in variable compensation is the
increased front office variable incentive compensation of $33.4 million.
Additionally, administrative, centralized and local operations and executive
incentive compensation increased $4.7 million to $18.7 million in the current
six months ended compared to $14.0 million in the prior year, primarily due to
increased headcount and company performance.
The fixed portion of compensation and benefits increased $15.6 million, or 18%
to $103.5 million in the current six months ended compared to $87.9 million in
the prior year. Non-variable salaries increased $12.3 million, or 20%, primarily
due to our recent acquisitions and new business initiatives, which added $5.5
million in the current six months ended. Employee benefits, excluding
share-based compensation, increased $3.2 million in the current six months
ended, primarily related to higher payroll, health care and retirement costs
from the increased headcount. Share-based compensation is a component of the
fixed portion, and includes stock option and restricted stock expense.
Share-based compensation was $5.0 million in the current six months ended
compared to $3.8 million in the prior year. The number of employees was 2,151 at
the end of the current six months ended compared to 2,012 at the end of the
prior year.
Other Expenses: Other non-compensation expenses increased $18.2 million, or 24%
to $95.5 million in the current six months ended compared to $77.3 million in
the prior year. Other non-compensation expenses related to acquisitions closed
and new business initiatives began after September 2018 added $5.1 million in
the current six months ended.
Trading systems and market information costs increased $2.9 million, of which
$2.5 million was related to incremental costs from recent acquisitions and new
business initiatives. Professional fees increased $0.4 million, primarily
related to higher legal fees from ongoing merger and acquisition activity,
partially offset by insurance reimbursement for certain legal defenses.
Non-trading technology and support increased $2.7 million, primarily due to
higher costs from non-trading software as a service arrangements related to
various IT, client engagement, accounting and human resources systems, higher
costs from external data center services, and incremental costs due to
acquisitions and new business initiatives during the current six months ended.
Depreciation and amortization increased primarily due to higher depreciation
expense of leaseholds and IT equipment, and higher amortization expense of
intangible assets recorded as part of the acquisitions completed during the
current six months ended. Other expense increased primarily related to our
jointly held internal bi-annual global sales meeting and customer Global Markets
Outlook Conference held during February 2020.
Excluding the bad debt on physical coal discussed below, bad debts increased
$3.4 million year-over-year. During the current six months ended, bad debts were
$4.4 million, primarily related to $3.9 million of OTC client account deficits
in the Commercial Hedging segment, $0.3 million of client deficits in the
Clearing & Execution Services segment and $0.2 million in uncollected
receivables in the Physical Commodities segment. During the prior year, bad
debts were $1.0 million, primarily related to client deficit accounts in the
Commercial Hedging and Clearing & Execution Services segments.
Recovery of Bad Debt on Physical Coal: During the prior year, we reached
settlements with clients, paying $8.4 million related to demurrage, dead
freight, and other penalty charges regarding coal supplied during fiscal 2017.
The settlement

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amounts paid were less than the accrued liability for the transactions recorded
during fiscal 2017 and fiscal 2018, and accordingly we recorded a recovery on
the bad debt on physical coal of $2.4 million.
Other Gain: The prior year includes a bargain purchase gain of $5.4 million
related to the acquisition of INTL FCStone Credit Trading, LLC (formerly GMP
Securities LLC).
Provision for Taxes: The effective income tax rate was 29% in the current six
months ended compared to 25% in the prior year. For the six months ended March
31, 2020 and 2019, the effective rate was higher than the U.S. federal statutory
rate of 21% due to U.S. state and local taxes, GILTI, U.S. and foreign permanent
differences, and the amount of foreign earnings taxed at higher tax rates. The
estimated GILTI tax expense increased the effective rate approximately 1.2% and
1.3% for the six months ended March 31, 2020 and 2019, respectively. The amount
of foreign earnings taxed at higher tax rates increased the effective tax rate
approximately 3.3% and 0.5% for the six months ended March 31, 2020 and 2019.
Unallocated Costs and Expenses
The following table is a breakout of our unallocated costs and expenses from the
total costs and expenses shown above. The unallocated costs and expenses include
certain shared services such as information technology, accounting and treasury,
credit and risk, legal and compliance, and human resources and other activities.
                                  Three Months Ended March 31,                Six Months Ended March 31,
(in millions)                   2020         % Change        2019          2020          % Change        2019
Compensation and benefits:
Variable compensation and
benefits                    $      9.9          55  %     $    6.4$      16.3          36  %     $   12.0
Fixed compensation and
benefits                          21.4          16  %         18.5            41.7          17  %         35.6
                                  31.3          26  %         24.9            58.0          22  %         47.6
Other expenses:
Trading systems and market
information                        0.7         133  %          0.3             1.2          71  %          0.7
Occupancy and equipment
rental                             4.9           -  %          4.9             9.9           6  %          9.3
Professional fees                  3.9          11  %          3.5             7.9          16  %          6.8
Travel and business
development                        0.6         (40 )%          1.0             2.0          (5 )%          2.1
Non-trading technology and
support                            4.7          21  %          3.9             9.4          36  %          6.9
Depreciation and
amortization                       3.8          46  %          2.6             7.7          57  %          4.9
Communications                     1.3         (35 )%          2.0             2.7         (16 )%          3.2
Other                              6.5          44  %          4.5            10.4          28  %          8.1
                                  26.4          16  %         22.7            51.2          22  %         42.0
Total compensation and
other expenses              $     57.7          21  %     $   47.6$     109.2          22  %     $   89.6


Total unallocated costs and other expenses increased $10.1 million to $57.7
million in the second quarter compared to $47.6 million in the prior year.
Compensation and benefits increased $6.4 million, or 26%, to $31.3 million in
the second quarter compared to $24.9 million in the prior year. The increase in
fixed compensation and benefits is primarily related to a 23% increase in
headcount across several administrative departments, including IT, compliance
and accounting. The increase in variable compensation and benefits is primarily
due to improved overall company performance.
Other non-compensation expenses increased $3.7 million, or 16%, to $26.4 million
in the second quarter compared to $22.7 million in the prior year. Other expense
increased primarily related to our jointly held internal bi-annual global sales
meeting and customer Global Markets Outlook Conference held during February
2020.
Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
Total unallocated costs and other expenses increased $19.6 million to $109.2
million in the current six months ended compared to $89.6 million in the prior
year. Compensation and benefits increased $10.4 million, or 22% to $58.0 million
in the current six months ended compared to $47.6 million in the prior year.
During the current six months ended, the increase in fixed compensation and
benefits is primarily related to a 23% increase in headcount across several
administrative departments, including IT, compliance and accounting. The
increase in variable compensation and benefits is primarily due to improved
overall company performance.
Other non-compensation expenses increased $9.2 million, or 22%, to $51.2 million
in the second quarter compared to $42.0 million in the prior year. Non-trading
technology and support increased due to higher costs from non-trading software
as a service arrangements related to various IT, client engagement, accounting
and human resources systems and higher costs from external data center services.
Other expense increased primarily related to our jointly held internal bi-annual
global sales meeting and customer Global Markets Outlook Conference held during
February 2020.

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Variable vs. Fixed Expenses

                              Three Months Ended March 31,                  

Six Months Ended March 31,

                                        % of                  % of                   % of                   % of
(in millions)             2020          Total      2019       Total       2020       Total      2019       Total
Variable
compensation and
benefits            $     82.6            29 %   $  51.4        25 %   $  137.2        27 %   $  99.1        24  %
Transaction-based
clearing expenses         63.8            23 %      42.7        21 %      110.1        22 %      92.8        22  %
Introducing broker
commissions               29.6            11 %      24.8        11 %       55.8        11 %      57.4        14  %
Total variable
expenses                 176.0            63 %     118.9        57 %      303.1        60 %     249.3        60  %
Fixed compensation
and benefits              54.1            19 %      46.5        22 %      103.5        21 %      87.9        21  %
Other fixed
expenses                  46.2            16 %      41.1        21 %       91.1        18 %      78.7        20  %
Bad debts                  4.4             2 %       0.7         - %        4.4         1 %       1.0         -  %
Recovery of bad
debt on physical
coal                         -             - %         -         - %          -         - %      (2.4 )      (1 )%
Total non-variable
expenses                 104.7            37 %      88.3        43 %      199.0        40 %     165.2        40  %
Total non-interest
expenses            $    280.7           100 %   $ 207.2       100 %   $  

502.1 100 % $ 414.5 100 %



We seek to make our non-interest expenses variable to the greatest extent
possible, and to keep our fixed costs as low as possible. The table above shows
an analysis of our variable expenses and non-variable expenses as a percentage
of total non-interest expenses for the three and six months ended March 31, 2020
and 2019, respectively.
Our variable expenses include variable compensation paid to traders and risk
management consultants, bonuses paid to operational, administrative, and
executive employees, transaction-based clearing expenses and introducing broker
commissions. As a percentage of total non-interest expenses, variable expenses
were 63% in the second quarter compared to 57% in the prior year. As a
percentage of total non-interest expenses, variable expenses were 60% in the
current six months ended as well as in the prior year.
During the second quarter, non-variable expenses, excluding bad debts, increased
$12.7 million, or 14%, period-over-period, of which $3.5 million of the increase
relates to acquisitions closed and new business initiatives began after March
2019. During the current six months ended, non-variable expenses, excluding bad
debts and the recovery of bad debt on physical coal, increased $28.0 million, or
17%, period-over-period, of which $12.0 million of the increase relates to
acquisitions closed and new business initiatives began after September 2018. We
view these acquisitions and expansion efforts as long-term strategic decisions,
and they provided incremental pre-tax income for the current quarter and current
six months ended.
Segment Information
Our business activities are managed as operating segments and organized into
reportable segments as follows:
                                             INTL FCStone Inc.


                                                                                             Clearing and
                                                                                          Execution Services
Commercial Hedging      Global Payments         Securities        Physical Commodities         ("CES")
Components:            Component:           Components:           Components:             Components:
- Financial Ag         - Global Payments    - Equity Capital      - Precious Metals       - Exchange-Traded
   & Energy                                    Markets                                    Futures & Options
- LME Metals                                                                              - FX Prime
                                            - Debt Capital        - Physical Ag           Brokerage
                                            Markets                  & Energy             - Correspondent
                                                                                          Clearing
                                            - Asset Management                            - Independent
                                                                                          Wealth Management
                                                                                          - Derivative
                                                                                          Voice Brokerage


We report our operating segments based on services provided to clients. Net
contribution is one of the key measures used by management to assess the
performance of each segment and for decisions regarding the allocation of our
resources. Net contribution is calculated as revenues less cost of sales of
physical commodities, transaction-based clearing expenses, introducing broker
commissions, interest expense and variable compensation. Variable compensation
paid to risk management

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consultants and traders generally represents a fixed percentage, that can vary
by revenue type, of an amount equal to revenues generated, and in some cases,
revenues generated less transaction-based clearing expenses, base salaries and
an overhead allocation.
Segment income is calculated as net contribution less non-variable direct
segment costs. These non-variable direct expenses include trader base
compensation and benefits, operational charges, trading systems and market
information, professional fees, travel and business development, communications,
bad debts, trade errors and direct marketing expenses.
Total Segment Results
The following table shows summary information concerning all of our business
segments combined.
                                     Three Months Ended March 31,                          Six Months Ended March 31,
                                           % of                      % of                       % of                       % of
                                         Operating                 Operating                  Operating                  Operating
(in millions)                 2020       Revenues       2019       Revenues        2020       Revenues        2019       Revenues
Revenues:
Sales of physical
commodities               $ 20,016.9$ 6,929.5$ 30,994.9$ 13,225.3
Principal gains, net           167.9                     110.8                      279.6                      204.5
Commission and clearing
fees                           117.0                      85.5                      204.5                      185.2
Consulting, management,
and account fees                22.1                      18.3                       42.9                       37.0
Interest income                 45.1                      51.0                       93.5                       98.6
Total revenues              20,369.0                   7,195.1                   31,615.4                   13,750.6
Cost of sales of physical
commodities                 19,999.5                   6,921.1                   30,967.7                   13,208.6
Operating revenues             369.5       100%          274.0       100%           647.7       100%           542.0       100%
Transaction-based
clearing expenses               63.5        17%           42.5        16%           109.5        17%            92.4        17%
Introducing broker
commissions                     29.6        8%            24.8        9%             55.8        9%             57.4        11%
Interest expense                29.5        8%            37.0        14%            62.3        10%            68.8        13%
Net operating revenues         246.9                     169.7                      420.1                      323.4
Variable direct
compensation and benefits       72.0        19%           44.4        16%           119.4        18%            85.8        16%
Net contribution               174.9                     125.3                      300.7                      237.6
Fixed compensation and
benefits                        28.4                      24.1                       53.4                       44.8
Other fixed expenses            24.8                      23.3                       49.8                       45.5
Bad debts                        4.4                       0.7                        4.4                        1.0
Recovery of bad debt on
physical coal                      -                         -                          -                       (2.4 )
Total non-variable direct
expenses                        57.6        16%           48.1        18%           107.6        17%            88.9        16%
Segment income            $    117.3$    77.2$    193.1$    148.7


Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Net contribution for all of our business segments increased 40% to $174.9
million in the second quarter compared to $125.3 million in the prior year.
Segment income increased modestly to $117.3 million in the second quarter
compared to $77.2 million in the prior year.
Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
Net contribution for all of our business segments increased 27% to $300.7
million in the current six months ended compared to $237.6 million in the prior
year. Segment income increased 30% to $193.1 million in the current six months
ended compared to $148.7 million in the prior year.

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Commercial Hedging
We serve our commercial clients through our team of risk management consultants,
providing a high-value-added service that we believe differentiates us from our
competitors and maximizes the opportunity to retain our clients. Our risk
management consulting services are designed to quantify and monitor commercial
entities' exposure to commodity and financial risk. Upon assessing this
exposure, we develop a plan to control and hedge these risks with post-trade
reporting against specific client objectives. Our clients are assisted in the
execution of their hedging strategies through a wide range of products from
listed exchange-traded futures and options, to basic OTC instruments that offer
greater flexibility, to structured OTC products designed for customized
solutions.
Our services span virtually all traded commodity markets, with the largest
concentrations in agricultural and energy commodities (consisting primarily of
grains, energy and renewable fuels, coffee, sugar, cotton, and food service) and
base metals products listed on the LME. Our base metals business includes a
position as a Category One ring dealing member of the LME, providing execution,
clearing and advisory services in exchange-traded futures and OTC products. We
also provide execution of foreign currency forwards and options and interest
rate swaps as well as a wide range of structured product solutions to our
commercial clients who are seeking cost-effective hedging strategies. Generally,
our clients direct their own trading activity, and our risk management
consultants do not have discretionary authority to transact trades on behalf of
our clients.
The following table provides the financial performance for Commercial Hedging
for the periods indicated.
                                    Three Months Ended March 31,            Six Months Ended March 31,
(in millions)                       2020       % Change     2019            2020         % Change     2019
Revenues:
Sales of physical commodities    $       -        -       $     -     $       -             -       $     -
Principal gains, net                  59.2       43%         41.5          90.8            46%         62.1

Commission and clearing fees 33.3 19% 28.0 61.3

            10%         55.5
Consulting, management, and
account fees                           4.2       11%          3.8           8.5             9%          7.8
Interest income                        5.0      (32)%         7.3          10.8           (28)%        15.0
Total revenues                       101.7       26%         80.6         171.4            22%        140.4
Cost of sales of physical
commodities                              -        -             -             -             -             -
Operating revenues                   101.7       26%         80.6         171.4            22%        140.4
Transaction-based clearing
expenses                              10.7       23%          8.7          19.7            11%         17.8
Introducing broker commissions         6.4       12%          5.7          12.3            15%         10.7
Interest expense                       0.4        -%          0.4           0.8             -%          0.8
Net operating revenues                84.2       28%         65.8         138.6            25%        111.1
Variable compensation and
benefits                              25.1       52%         16.5          40.7            30%         31.2
Net contribution                      59.1       20%         49.3          97.9            23%         79.9
Fixed compensation and benefits        9.3        8%          8.6          17.4             4%         16.7
Other fixed expenses                  10.1        3%          9.8          19.3             2%         18.9
Bad debts                              3.9       457%         0.7           3.9            388%         0.8
Total non-variable direct
expenses                              23.3       22%         19.1          40.6            12%         36.4
Segment income                   $    35.8       19%      $  30.2$    57.3            32%      $  43.5

The following tables set forth transactional revenues and selected data for Commercial Hedging for the periods indicated.

Exchange-traded

                                       Three Months Ended March 31,         

Six Months Ended March 31,

                                       2020          % Change      2019           2020         % Change       2019
Transactional revenues (in millions):
Agricultural                     $     24.0            25%      $   19.2$     43.3          17%      $     37.1
Energy and renewable fuels              2.5            25%           2.0            4.5          13%             4.0
LME metals                             18.8            25%          15.1           31.6          15%            27.5
Other                                   2.3           (12)%          2.6            4.5         (24)%            5.9
                                 $     47.6            22%      $   38.9$     83.9          13%      $     74.5
Selected data:
Futures and options (contracts,
000's)                              8,709.9            37%       6,363.8       15,818.8          21%        13,090.6
Average rate per contract        $     5.39           (10)%     $   5.99$     5.22          (6)%     $     5.58
Average client equity - futures
and options (millions)           $    943.6             3%      $  918.3$    923.7          (4)%     $    960.9



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                                                                       OTC
                                       Three Months Ended March 31,              Six Months Ended March 31,
                                       2020          % Change     2019           2020        % Change     2019
Transactional revenues (in millions):
Agricultural                     $     19.8            13%      $  17.5$    38.2          16%      $  32.9
Energy and renewable fuels             22.0            358%         4.8          25.8          177%         9.3
Other                                   3.1           (64)%         8.5           4.2          367%         0.9
                                 $     44.9            46%      $  30.8$    68.2          58%      $  43.1
Selected data:
Volume (contracts, 000's)             609.5            59%        383.5       1,098.5          39%        792.8
Average rate per contract        $    72.45            (8)%     $ 78.49

$ 60.69 16% $ 52.35



Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Operating revenues increased 26% to a record $101.7 million in the second
quarter compared to $80.6 million in the prior year. Exchange-traded revenues
increased 22%, to $47.6 million in the second quarter, primarily driven by
strong performance in domestic and Latin American markets as well as expansion
efforts in Europe and Canada. Overall exchange-traded contract volumes increased
37% versus the prior year, however the average rate per contract declined 10% to
$5.39.
OTC revenues increased 46%, to $44.9 million in the second quarter, compared to
$30.8 million in the prior year. OTC volumes increased 59% in the second quarter
compared to the prior year. Agricultural OTC revenues increased 13% versus the
prior year, driven by increased volumes in grain, soft commodity and dairy
markets. Energy and renewable fuels OTC revenues increased 358% to $22.0 million
in the second quarter driven by high volatility caused by economic concerns over
the COVID-19 pandemic. OTC revenues noted in the 'Other' category above, were
positively effected in the prior year period by the partial reversal of
marked-to-market declines, related to longer tenor positions, recorded in the
first fiscal quarter of 2019, which were directionally hedged but suffered from
declines in value during periods of lower market activity at the end of that
calendar year.
Consulting, management, and account fees increased 11% compared to the prior
year to $4.2 million in the second quarter. Interest income, decreased 32%, to
$5.0 million compared to $7.3 million in the prior year. The decline in interest
income was driven by lower short-term interest rates as a result of the Federal
Open Market Committee ("FOMC") actions to reduce short term interest rates in
the first and second quarters of fiscal 2020. These interest rate cuts were
partially offset by a 3% increase in average equity for exchange-traded futures
and options clients versus the prior year to $943.6 million in the second
quarter.
Segment income increased 19% to $35.8 million in the second quarter compared to
$30.2 million in the prior year, primarily as a result of the $21.1 million
increase in operating revenues. The increase in operating revenues were
partially offset by a $0.7 million increase in fixed compensation and benefits
as well as a $3.2 million increase in bad debt expense. Variable expenses,
excluding interest, expressed as a percentage of operating revenues increased to
41% compared to 38% in the prior year, primarily as the result of the effect of
the marked-to-market adjustment noted above in OTC revenues on variable
compensation ratios in the prior year period.
Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
Operating revenues increased 22% to $171.4 million in the current six months
ended compared to $140.4 million in the prior year. Exchange-traded revenues
increased 13% to $83.9 million in the current six months ended driven by
increases in agricultural commodities as well as in LME metals which were
partially offset by declines in activity from certain omnibus relationships in
the Far East, which are reflected in the 'Other' category above. Overall
exchange-traded contract volume increased 21%, while the average rate per
contract decreased 6% to $5.22.
OTC revenues increased 58%, to $68.2 million in the current six months ended
driven by a 39% increase in OTC volumes as well as a 16% increase in the average
rate per contract compared to the prior year. The increase in OTC revenues was
primarily driven by a $16.5 million increase in energy and renewable fuels
revenues as a result of high volatility caused by economic concerns over the
COVID-19 pandemic. In addition, agricultural OTC revenues increased 16% as of
result of increased activity in Latin American grain markets as well as improved
rate per contract realized in global dairy markets. OTC revenues noted in the
'Other' category above, were negatively affected in the prior year period by the
marked-to-market declines, related to longer tenor positions, which were
directionally hedged but suffered from declines in value during periods of lower
market activity at the end of that calendar year.
Consulting, management and account fees increased 9% to $8.5 million in the
current six months ended compared to $7.8 million in the prior year while
interest income declined 28%, to $10.8 million, in the current six months ended
compared to $15.0 million in the prior year. The decline in interest income was
driven by lower short-term interest rates as a result of FOMC

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actions to reduce short term interest rates in the first and second quarters of
fiscal 2020 as well as a 4% decline in average client equity to $923.7 million.
Segment income increased 32% to $57.3 million in the current six months ended
compared to $43.5 million in the prior year, driven by the growth in operating
revenues which was partially offset by a $3.1 million increase in bad debt
expense. Variable expenses, excluding interest, expressed as a percentage of
operating revenues were 42% in the current six months ended as compared to 43%
in the prior year.
Global Payments
We provide customized foreign exchange and treasury services to banks and
commercial businesses as well as charities and non-governmental and government
organizations. We provide transparent pricing and offer payments services in
more than 170 countries and 140 currencies, which we believe is more than any
other payments solution provider.
Our proprietary FXecute global payments platform is integrated with a financial
information exchange ("FIX") protocol. This FIX protocol is an electronic
communication method for the real-time exchange of information, and we believe
it represents one of the first FIX offerings for cross-border payments in exotic
currencies. FIX functionality allows clients to view real time market rates for
various currencies, execute and manage orders in real-time, and view the status
of their payments through the easy-to-use portal.
Additionally, as a member of the Society for Worldwide Interbank Financial
Telecommunication ("SWIFT"), we are able to offer our services to large money
center and global banks seeking more competitive international payment services.
In addition, we operate a fully accredited SWIFT Service Bureau which
facilitates cross-border payments and acceptance transactions for financial
institutions, trade networks and corporations.
Through this single comprehensive platform and our commitment to client service,
we believe we are able to provide simple and fast execution, ensuring delivery
of funds in local currency to any of these countries quickly through our global
network of approximately 325 correspondent banks. In this business, we primarily
act as a principal in buying and selling foreign currencies on a spot basis. We
derive revenue from the difference between the purchase and sale prices.
We believe our clients value our ability to provide exchange rates that are
significantly more competitive than those offered by large international banks,
a competitive advantage that stems from our years of foreign exchange expertise
focused on smaller, less liquid currencies.
The following table provides the financial performance and selected data for
Global Payments for the periods indicated.
                                      Three Months Ended March 31,              Six Months Ended March 31,
(in millions)                         2020         % Change      2019          2020       % Change      2019
Revenues:
Sales of physical commodities    $        -           -       $      -     $        -        -       $      -
Principal gains, net                   27.9           7%          26.1           57.5        6%          54.2
Commission and clearing fees            1.0          11%           0.9            2.0       11%           1.8
Consulting, management, account
fees                                    0.5          25%           0.4            1.3       30%           1.0
Interest income                           -           -              -              -      (100)%         0.1
Total revenues                         29.4           7%          27.4           60.8        6%          57.1
Cost of sales of physical
commodities                               -           -              -              -        -              -
Operating revenues                     29.4           7%          27.4           60.8        6%          57.1
Transaction-based clearing
expenses                                1.3           -%           1.3            2.7       17%           2.3

Introducing broker commissions 0.1 (50)% 0.2

      0.3      (25)%          0.4
Interest expense                          -         (100)%         0.1              -      (100)%         0.2
Net operating revenues                 28.0           9%          25.8           57.8        7%          54.2
Variable compensation and
benefits                                5.4          13%           4.8           11.4       13%          10.1
Net contribution                       22.6           8%          21.0           46.4        5%          44.1
Fixed compensation and benefits         3.0          25%           2.4            5.6       24%           4.5
Other fixed expenses                    2.4         (14)%          2.8            4.7      (10)%          5.2
Bad debts                                 -           -              -              -        -              -
Total non-variable direct
expenses                                5.4           4%           5.2           10.3        6%           9.7
Segment income                   $     17.2           9%      $   15.8$     36.1        5%      $   34.4
Selected data:
Global Payments (# of payments,
000's)                                203.9          25%         162.8      

398.1 21% 329.4 Average revenue per payment $ 141.74 (15)% $ 165.85$ 149.46 (12)% $ 170.01




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Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Operating revenues increased 7% to a record $29.4 million in the second quarter
compared to $27.4 million in the prior year, driven by 25% growth in the volume
of payments made, which was partially offset by a 15% decline in the average
revenue per payment compared to the prior year. The decline in the average
revenue per payment was primarily driven by decline in the number of capital
market transactions from our international banking clients.
Segment income increased 9% to $17.2 million in the second quarter compared to
$15.8 million in the prior year. This increase primarily resulted from higher
operating revenues, partially offset by an increase in fixed compensation and
benefits compared to the prior year. Variable expenses, excluding interest,
expressed as a percentage of operating revenues were 23% in the second quarter
as well as in the prior year.
Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
Operating revenues increased 6% to $60.8 million in the current six months ended
compared to $57.1 million in the prior year, driven by 21% growth in the volume
of payments made and a 12% decline in the average revenue per payment compared
to the prior year. The decline in the average revenue per payment was primarily
driven by decline in the number of capital market transactions from our
international banking clients.
Segment income increased 5% to $36.1 million in the current six months ended
compared to $34.4 million in the prior year. This increase primarily resulted
from higher operating revenues, partially offset by a $0.6 million increase in
non-variable direct expenses versus the prior year period. Variable expenses,
excluding interest, expressed as a percentage of operating revenues increased to
24% in the current six months ended compared to 22% in the prior year, primarily
as a result of an increase in variable compensation.
Securities
We provide value-added solutions that facilitate cross-border trading and
believe our clients value our ability to manage complex transactions, including
foreign exchange, utilizing our local understanding of market convention,
liquidity and settlement protocols around the world. Our clients include
U.S.-based regional and national broker-dealers and institutions investing or
executing client transactions in international markets and foreign institutions
seeking access to the U.S. securities markets. We are one of the leading market
makers in foreign securities, making markets in over 5,000 ADRs, GDRs and
foreign ordinary shares, of which over 3,600 trade in the OTC market. In
addition, we will, on request, make prices in more than 10,000 unlisted foreign
securities. We are also a broker-dealer in Argentina and Brazil where we are
active in providing institutional executions in the local capital markets.
We act as an institutional dealer in fixed income securities, including U.S.Treasury, U.S. government agency, agency mortgage-backed and asset-backed
securities as well as investment grade, high yield, convertible and emerging
market debt to a client base including asset managers, commercial bank trust and
investment departments, broker-dealers and insurance companies.
We originate, structure and place debt instruments in the international and
domestic capital markets. These instruments include complex asset-backed
securities (primarily in Argentina) and domestic municipal securities. On
occasion, we may invest our own capital in debt instruments before selling them.
We also actively trade in a variety of international debt instruments as well as
operate an asset management business in which we earn fees, commissions and
other revenues for management of third party assets and investment gains or
losses on our investments in funds and proprietary accounts managed either by
our investment managers or by independent investment managers.

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The following table provides the financial performance for Securities for the
periods indicated.
                                    Three Months Ended March 31,            Six Months Ended March 31,
(in millions)                       2020       % Change     2019            2020         % Change     2019
Revenues:
Sales of physical commodities    $       -        -       $     -     $       -             -       $     -
Principal gains, net                  70.1       126%        31.0         109.4            66%         66.0

Commission and clearing fees 16.0 98% 8.1 24.7

            73%         14.3
Consulting, management, and
account fees                           2.1       11%          1.9           3.8            12%          3.4
Interest income                       29.7       (6)%        31.6          61.1             6%         57.9
Total revenues                       117.9       62%         72.6         199.0            41%        141.6
Cost of sales of physical
commodities                              -        -             -             -             -             -
Operating revenues                   117.9       62%         72.6         199.0            41%        141.6
Transaction-based clearing
expenses                              16.5       50%         11.0          27.8            15%         24.2
Introducing broker commissions         0.5        -%          0.5           0.9            29%          0.7
Interest expense                      22.8      (22)%        29.1          49.1            (7)%        52.6
Net operating revenues                78.1       144%        32.0         121.2            89%         64.1
Variable compensation and
benefits                              27.6       132%        11.9          43.3            95%         22.2
Net contribution                      50.5       151%        20.1          77.9            86%         41.9
Fixed compensation and benefits        7.7       51%          5.1          14.3            70%          8.4
Other fixed expenses                   4.4       38%          3.2           8.5            49%          5.7
Bad debts                                -        -             -             -             -%            -
Total non-variable direct
expenses                              12.1       46%          8.3          22.8            62%         14.1
Segment income                   $    38.4       225%     $  11.8$    55.1            98%      $  27.8

The following table sets forth operating revenues by product line and selected data for Securities for the periods indicated.

                                      Three Months Ended March 31,          

Six Months Ended March 31,

                                     2020       % Change       2019           2020        % Change       2019
Operating revenues by product line (in millions):
Equity Capital Markets           $     67.1       83%      $     36.7$     103.5       39%      $      74.4
Debt Capital Markets                   48.7       42%            34.3            91.9       45%             63.4
Asset Management                        2.1       31%             1.6             3.6       (5)%             3.8
                                 $    117.9       62%      $     72.6$     199.0       41%      $     141.6
Selected data:
Equity Capital Markets (gross
dollar volume, millions)         $ 86,953.2       134%     $ 37,238.8$ 126,884.2       58%      $  80,547.5Equity Capital Markets revenue
per $1,000 traded                $     0.66       (6)%     $     0.70$      0.66      (10)%     $      0.73Debt Capital Markets (principal
dollar volume, millions)         $ 51,612.0      (11)%     $ 58,230.1$  91,815.7      (23)%     $ 118,907.3Debt Capital Markets revenue per
$1,000 traded                    $     0.94       59%      $     0.59$      1.00       89%      $      0.53
Average assets under management
in Argentina (millions)          $    331.3       (5)%     $    347.3     $ 

306.5 (3)% $ 315.0



Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Operating revenues increased 62% to a record $117.9 million in the second
quarter compared to $72.6 million in the prior year.
Operating revenues in Equity Capital Markets increased 83% in the second quarter
compared to the prior year period as the gross dollar volume traded increased
134% which was partially offset by a 6% decline in the average revenue per
$1,000 traded as compared to the prior year period. The strong volume growth was
primarily related to increased customer flow to our equity market making desk as
a result of periods of high volatility in the global equities markets as a
result of economic concerns related to the COVID-19 pandemic. Equity Capital
Markets operating revenues include the trading profits we earn before the
related expense deduction for ADR conversion fees. These ADR fees are included
in the consolidated income statements as 'transaction-based clearing expenses'.
Operating revenues in Debt Capital Markets increased 42% in the second quarter
compared to the prior year, as a 11% decline in principal dollar volume was more
than offset by a 59% increase in the revenue per $1,000 traded. The significant
increase in the revenue per $1,000 traded was the result of a widening of
spreads, particularly in March 2020, due to the global pandemic. While the U.S.Federal Reserve intervened with unprecedented monetary policy and emergency
stimulus measures, fixed income markets remained highly volatile through the end
of the second quarter.

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Operating revenues in Asset Management increased 31% in the second quarter
compared to the prior year as average assets under management in Argentina
declined modestly in the second quarter to $331.3 million compared to $347.3
million in the prior year.
Segment income increased 225% to $38.4 million in the second quarter compared to
$11.8 million in the prior year. Segment income in our Equity Capital Markets
business increased $17.0 million to $22.0 million, as a result of the
significant increase in operating revenues which was partially offset by a $2.2
million increase in non-variable direct expenses, primarily associated with the
continued build out of several recent initiatives including equity prime
brokerage. Segment income in our Debt Capital Markets business increased $9.6
million to $15.4 million, primarily driven by the increase in operating revenues
noted above. Variable expenses, excluding interest, expressed as a percentage of
operating revenues were 38% in the second quarter as compared to 32% in the
prior year. This increase in variable expenses, was primarily driven by an
increase in variable compensation resulting from the significant increase in
operating revenues.
Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
Operating revenues increased 41% to $199.0 million in the current six months
ended compared to $141.6 million in the prior year.
Operating revenues in Equity Capital Markets increased 39% in the current six
months ended compared to the prior year. This increase was driven by a 58%
increase in the gross dollar volume traded, most notably in the second quarter
of fiscal 2020 driven by periods of high volatility in the global equity markets
as a result of economic concerns related to the COVID-19 pandemic. In addition,
the increase in Equity Capital Market operating revenues were driven by a $3.9
million increase in revenues from our conduit securities lending activities.
Equity Capital Markets operating revenues include the trading profits we earn
before the related expense deduction for ADR conversion fees. These ADR fees are
included in the consolidated income statements as 'transaction-based clearing
expenses'.
Operating revenues in Debt Capital Markets increased 45% in the current six
months ended compared to the prior year, despite a 23% decline in the principal
dollar volume traded, as the revenue per $1,000 traded increased 89% in the
current six months ended compared to the prior year. Asset Management operating
revenues decreased 5% in the current six months ended compared to the prior year
as average assets under management in Argentina decreased 3% to $306.5 million
in the current six months ended compared to $315.0 million in the prior year.
Segment income increased 98% to $55.1 million in the current six months ended
compared to $27.8 million in the prior year, primarily as a result of the
increase in operating revenues noted above, which was tempered by higher
variable compensation expense as a percentage of operating revenues due to
strong performance in the current six months ended, as well as an $8.7 million
increase in non-variable direct expenses, primarily associated with the
continued build out of several recent acquisitions and initiatives, including
equity prime brokerage. Variable expenses, excluding interest, expressed as a
percentage of operating revenues increased to 36% in the current six months
ended compared to 33% in the prior year, primarily as the result of a higher
variable compensation, which was partially offset by a decrease in
transaction-based clearing expenses.
Physical CommoditiesThe Physical Commodities segment consists of our Precious Metals trading and
Physical Ag & Energy commodity businesses. In Precious Metals, we provide a full
range of trading and hedging capabilities, including OTC products, to select
producers, consumers, and investors. Through our websites, we provide clients
the ability to purchase physical gold and other precious metals, in multiple
forms, and in denominations of their choice. In our trading activities, we act
as a principal, committing our own capital to buy and sell precious metals on a
spot and forward basis.
In our Physical Ag & Energy commodity business, we act as a principal to
facilitate financing, structured pricing and logistics services to clients
across the commodity complex, including energy commodities, grains, oil seeds,
cotton, coffee, cocoa, edible oils and feed products. We provide financing to
commercial commodity-related companies against physical inventories. We use sale
and repurchase agreements to purchase commodities evidenced by warehouse
receipts, subject to a simultaneous agreement to sell such commodities back to
the original seller at a later date.
We generally mitigate the price risk associated with commodities held in
inventory through the use of derivatives. We do not elect hedge accounting under
U.S. GAAP in accounting for this price risk mitigation. Management continues to
evaluate performance and allocate resources on an operating revenue basis.

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The following table provides the financial performance for Physical Commodities
for the periods indicated.
                                     Three Months Ended March 31,              Six Months Ended March 31,
(in millions)                        2020       % Change      2019           2020       % Change       2019
Revenues:
Sales of physical commodities    $ 20,016.9       189%     $ 6,929.5$ 30,994.9       134%     $ 13,225.3
Principal gains, net                    2.4      (70)%           8.0            9.2      (13)%           10.6
Commission and clearing fees           (0.1 )     n/m              -              -       n/m             0.1
Consulting, management, and
account fees                            0.8       33%            0.6            1.2        9%             1.1
Interest income                         3.5       25%            2.8            6.5       16%             5.6
Total revenues                     20,023.5       188%       6,940.9       31,011.8       134%       13,242.7
Cost of sales of physical
commodities                        19,999.5       189%       6,921.1       30,967.7       134%       13,208.6
Operating revenues                     24.0       21%           19.8           44.1       29%            34.1
Transaction-based clearing
expenses                                0.4       33%            0.3            1.0       100%            0.5
Introducing broker commissions          0.3       200%           0.1            0.5       400%            0.1
Interest expense                        3.8      (12)%           4.3            7.2      (10)%            8.0
Net operating revenues                 19.5       29%           15.1           35.4       39%            25.5
Variable compensation and
benefits                                5.7       58%            3.6           10.3       49%             6.9
Net contribution                       13.8       20%           11.5           25.1       35%            18.6
Fixed compensation and benefits         2.4        4%            2.3            4.6        2%             4.5
Other fixed expenses                    1.6       14%            1.4            3.1       15%             2.7
Bad debts                               0.2       n/m              -            0.2       100%            0.1
Recovery of bad debt on physical
coal                                      -       n/m              -              -       n/m            (2.4 )
Total non-variable direct
expenses                                4.2       14%            3.7            7.9       61%             4.9
Segment income                   $      9.6       23%      $     7.8$     17.2       26%      $     13.7

The following tables set forth operating revenue by product line and selected data for Physical Commodities for the periods indicated.

Precious Metals

                                           Three Months Ended March 31,     

Six Months Ended March 31,

                                          2020        % Change      2019           2020       % Change       2019
Total revenues                        $  19,699.5       195%     $ 6,670.9$ 30,361.3       140%     $ 12,631.8
Cost of sales of physical commodities    19,684.8       196%       6,659.0       30,334.2       141%       12,612.2
Operating revenues                    $      14.7       24%      $    11.9$     27.1       38%      $     19.6
Selected data:
Gold equivalent ounces traded (000's)   121,618.2       56%       77,721.1      228,833.7       32%       172,940.7
Average revenue per ounce traded      $      0.12      (20)%     $    0.15$     0.12        9%      $     0.11


                                                                    Physical Ag & Energy
                                            Three Months Ended March 31,   

Six Months Ended March 31,

                                            2020          % Change     2019           2020        % Change     2019
Total revenues                        $    324.0            20%      $ 270.0$   650.5           6%      $ 610.9
Cost of sales of physical commodities      314.7            20%        262.1         633.5           6%        596.4
Operating revenues                    $      9.3            18%      $   7.9$    17.0          17%      $  14.5


Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Operating revenues for Physical Commodities increased 21% to $24.0 million in
the second quarter compared to $19.8 million in the prior year.
Precious Metals operating revenues increased 24% to $14.7 million in the second
quarter compared to $11.9 million in the prior year, driven by strong
performance in Asian markets as well as in CoinInvest GmbH and European Precious
Metal Trading GmbH which we acquired in the third quarter of fiscal 2019. The
number of gold equivalent ounces traded increased 56% versus the prior year and
the average revenue per ounce traded declined 20% compared to the prior year.
The growth in operating revenues was driven by a significant increase in
customer demand for precious metals in light of the COVID-19 global pandemic and
the resulting effect on the global economy. This operating revenue growth was
partially offset by marked-to-market declines related to the dislocation between
prices for Comex listed gold futures and over-the-counter precious metals
contracts related to the shutdown of global refiners and flight cancellations
due to COVID-19.

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Operating revenues in Physical Ag & Energy increased 18% to $9.3 million in the
second quarter compared to the prior year. The increase in operating revenues is
largely due to increased activity with customers in biodiesel feedstock markets
which was partially offset by lower activity in our commodity financing
programs.
Segment income increased 23% to $9.6 million in the second quarter compared to
$7.8 million in the prior year, primarily as a result of the increases in
operating revenues noted above.
Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
Operating revenues for Physical Commodities increased 29% to $44.1 million in
the current six months ended compared to $34.1 million in the prior year.
Precious Metals operating revenues increased 38% to $27.1 million in the current
six months ended compared to $19.6 million in the prior year. The number of gold
equivalent ounces traded increased 32% as compared to the prior year period,
while the average revenue per ounce traded increased 9% in the current six
months ended as compared to the prior year. The growth in operating revenues was
driven by the acquisition of CoinInvest GmbH and European Precious Metal Trading
GmbH in the third quarter of fiscal 2019 as well as a significant increase in
customer demand for precious metals in light of the COVID-19 global pandemic and
the resulting effect on the global economy.
Operating revenues in Physical Ag & Energy increased 17% to $17.0 million in the
current six months ended compared to $14.5 million in the prior year. The
increase in operating revenues is largely due to increased activity with
customers in biodiesel feedstock markets.
Segment income increased 26% to $17.2 million in the current six months ended
compared to $13.7 million in the prior year driven by the increase in operating
revenues. The prior year period included a $2.4 million recovery on the bad debt
on physical coal.
Clearing and Execution Services
We provide competitive and efficient clearing and execution in all major futures
and securities exchanges globally as well as prime brokerage in equities and
major foreign currency pairs and swap transactions. Through our platform, client
orders are accepted and directed to the appropriate exchange for execution. We
then facilitate the clearing of clients' transactions. Clearing involves the
matching of clients' trades with the exchange, the collection and management of
client margin deposits to support the transactions, and the accounting and
reporting of the transactions to clients.
As of March 31, 2020, our U.S. FCM held $2.5 billion in required client
segregated assets, which we believe makes us the third largest independent,
non-bank FCM in the U.S., as measured by required client segregated assets. We
seek to leverage our capabilities and capacity by offering facilities management
or outsourcing solutions to other FCM's.
We are an independent full-service provider to introducing broker-dealers
("IBD's") of clearing, custody, research, syndicated and security-based lending
products and services, including a proprietary technology platform which offers
seamless connectivity to ensure a positive client experience through the
clearing and settlement process. Our independent wealth management business,
which offers a comprehensive product suite to retail clients nationwide, clears
through this platform. We believe we are one of the leading mid-market clearers
in the securities industry, with approximately 70 correspondent clearing
relationships with approximately $15.0 billion in assets under management or
administration as of March 31, 2020.
We provide prime brokerage foreign exchange ("FX") services to financial
institutions and professional traders. We provide our clients with the full
range of OTC products, including 24-hour a day execution of spot, forwards and
options as well as non-deliverable forwards in both liquid and exotic
currencies. We also operate a proprietary foreign exchange desk that arbitrages
the exchange-traded foreign exchange markets with the cash markets.
Through our London-based Europe, Middle East and Africa ("EMEA") oil voice
brokerage business, we provide brokerage services across the fuel, crude, and
middle distillates markets with well-known commercial and institutional clients
throughout EMEA.

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The following table provides the financial performance and selected data for Clearing and Execution Services for the periods indicated.

                                    Three Months Ended March 31,            Six Months Ended March 31,
(in millions)                       2020       % Change     2019            2020         % Change     2019
Sales of physical commodities    $       -        -       $     -     $       -             -       $     -
Principal gains, net                   8.3       98%          4.2          12.7             9%         11.6

Commission and clearing fees 66.8 38% 48.5 116.5

             3%        113.5
Consulting, management, and
account fees                          14.5       25%         11.6          28.1            19%         23.7
Interest income                        6.9      (26)%         9.3          15.1           (25)%        20.0
Total revenues                        96.5       31%         73.6         172.4             2%        168.8
Cost of physical commodities
sold                                     -        -             -             -             -             -
Operating revenues                    96.5       31%         73.6         172.4             2%        168.8
Transaction-based clearing
expenses                              34.6       63%         21.2          58.3            22%         47.6
Introducing broker commissions        22.3       22%         18.3          41.8            (8)%        45.5
Interest expense                       2.5      (19)%         3.1           5.2           (28)%         7.2
Net operating revenues                37.1       20%         31.0          67.1            (2)%        68.5
Variable compensation and
benefits                               8.2        8%          7.6          13.7           (11)%        15.4
Net contribution                      28.9       24%         23.4          53.4             1%         53.1
Fixed compensation and benefits        6.0        5%          5.7          11.5             7%         10.7
Other fixed expenses                   6.3        3%          6.1          14.2             9%         13.0
Bad debts                              0.3       n/m            -           0.3            200%         0.1
Total non-variable direct
expenses                              12.6        7%         11.8          26.0             9%         23.8
Segment income                   $    16.3       41%      $  11.6$    27.4            (6)%     $  29.3

The following table sets forth operating revenues by product line and selected data for Clearing and Execution Services for the periods indicated.

                                      Three Months Ended March 31,                Six Months Ended March 31,
(in millions)                        2020        % Change       2019           2020        % Change       2019
Operating revenues by product line (in millions):
Exchange-Traded Futures &
Options                          $      50.6       43%      $     35.3$      88.5        3%      $      85.7
FX Prime Brokerage                       9.2       92%             4.8            14.2       15%             12.3
Correspondent Clearing                   8.0       (5)%            8.4            16.4       (2)%            16.7
Independent Wealth Management           23.2       30%            17.9            43.4       14%             38.1
Derivative Voice Brokerage               5.5      (24)%            7.2             9.9      (38)%            16.0
Operating revenues               $      96.5       31%      $     73.6$     172.4        2%      $     168.8
Selected data:
Exchange-traded - futures and
options (contracts, 000's)          38,901.5       71%        22,696.5        65,853.1       23%         53,496.8
Exchange-traded - futures and
options average rate per
contract                         $      1.13       (5)%     $     1.19$      1.12      (11)%     $      1.26
Average client equity - futures
and options (millions)           $   1,501.2       47%      $  1,018.3$   1,427.3       22%      $   1,173.7
FX Prime Brokerage volume (U.S.
notional, millions)              $ 129,998.7       62%      $ 80,435.6$ 204,350.3       20%      $ 170,380.3
Average money market / FDIC
sweep client balances (millions) $     956.9       24%      $    772.5$     969.2       26%      $     772.1


Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Operating revenues increased 31% to $96.5 million in the second quarter compared
to $73.6 million in the prior year.
Operating revenues in our Exchange-Traded Futures & Options business increased
43% to $50.6 million in the second quarter compared to $35.3 million in the
prior year as a result of a 71% increase in exchange-traded volumes and a 5%
decline in the average rate per contract compared to the prior year period. The
increase in operating revenues in the Exchange-Traded Futures & Options business
was driven by increased customer activity due to high market volatility caused
by economic concerns over the COVID-19 pandemic and to a lesser extent our
acquisition of the futures and options brokerage and clearing business of UOB
Bullion and Futures Limited. These increases were partially offset by a $2.0
million decrease in interest income in the

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Exchange-Traded Futures & Options business to $4.8 million in the second quarter
due to a decline in short-term rates, which was partially offset by a 47%
increase in average client equity compared to the prior year to $1.5 billion.
Operating revenues in our FX Prime Brokerage increased 92% compared to the prior
year to $9.2 million in the second quarter, as foreign exchange volumes
increased 62% in the second quarter compared to the prior year as a result of
increased volatility in foreign exchange market due to the effect of COVID-19.
Correspondent Clearing operating revenues decreased 5% compared to the prior
year to $8.0 million in the second quarter, while operating revenues in
Independent Wealth Management increased 30% to $23.2 million as compared to the
prior year. In the Correspondent Clearing business, interest income decreased
$0.5 million to $1.7 million in the second quarter due to a decline in short
term rates and fee income related to money market/FDIC sweep balances declined
$0.6 million to $3.1 million, despite a 24% increase in the average money
market/FDIC sweep balances as the result of a decline in short term rates.
Operating revenues in Derivative Voice Brokerage declined 24% to $5.5 million in
the second quarter compared to the prior year.
Segment income increased to $16.3 million in the second quarter compared to
$11.6 million in the prior year, primarily a result of the increase in operating
revenues, which was partially offset by a $0.5 million increase in non-variable
direct expenses, excluding bad debt. Variable expenses, excluding interest, as a
percentage of operating revenues increased to 67% in the second quarter as
compared to 64% in the prior year.
Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
Operating revenues were $172.4 million in the current six months ended compared
to $168.8 million in the prior year.
Operating revenues in our Exchange-Traded Futures & Options business increased
3% to $88.5 million in the current six months ended compared to $85.7 million in
the prior year. Exchange-traded volumes increased 23% as compared to the prior
year period, however the average rate per contract declined 11%. Interest income
in the Exchange-Traded Futures & Options business decreased $4.2 million to
$10.5 million in the current six months ended as a result of an increase in
short-term rates which was partially offset by a 22% increase in average client
equity to $1.4 billion.
Operating revenues in our FX Prime Brokerage increased 15% to $14.2 million in
the current six months ended compared to $12.3 million in the prior year as a
result of a 20% increase in foreign exchange volumes, most notably driven by
volatility in foreign exchange markets in the second quarter of 2020 related to
the effect of COVID-19. The prior year period includes a $2.7 million settlement
received related to the Barclays PLC 'last look' class action matter.
Operating revenues in the Correspondent Clearing decreased 2% to $16.4 million
in the current six months ended, while Independent Wealth Management operating
revenues increased 14% versus the prior year to $43.4 million. In the
Correspondent Clearing business, interest income decreased $1.1 million to $3.7
million the second quarter and fee income related to money market/FDIC sweep
balances declined $0.3 million to $6.7 million, both of which were primarily
driven by a decline in short term interest rates. Operating revenues in the
Derivative Voice Brokerage business decreased 38% versus the prior year to $9.9
million in the current six months ended.
Segment income decreased 6% to $27.4 million in the current six months ended
compared to $29.3 million in the prior year. The growth in operating revenue was
more than offset by a an increase in transaction-based clearing expenses as a
percentage of operating revenues due to product mix as well as a $2.0 million
increase in non-variable direct expenses, excluding bad debt. Variable expenses,
excluding interest, as a percentage of operating revenues were 66% in the
current six months ended compared to 64% in the prior year. As noted above, this
increase was related to an increase in transaction-based clearing expenses
related to product mix.
Liquidity, Financial Condition and Capital Resources
Overview
Liquidity is defined as our ability to generate sufficient amounts of cash to
meet all of our cash needs. Liquidity is of critical importance to us and
imperative to maintain our operations on a daily basis. Our senior management
establishes liquidity and capital policies, and monitors liquidity on a daily
basis. Senior management reviews business performance relative to these policies
and monitors the availability of our internal and external sources of financing.
Liquidity and capital matters are reported regularly to our board of directors.
INTL FCStone Financial is registered as a broker-dealer with the Securities and
Exchange Commission ("SEC") and is a member of the Financial Industry Regulatory
Authority ("FINRA") and the Municipal Securities Rulemaking Board ("MSRB"). In
addition, INTL FCStone Financial is registered as a futures commission merchant
with the CFTC and NFA, and a member of various commodities and futures exchanges
in the U.S. and abroad. INTL FCStone Financial has a responsibility to meet
margin calls at all exchanges on a daily basis and intra-day basis, if
necessary. We require our clients to make any required margin deposits the next
business day, and we require our largest clients to make intra-day margin
payments during

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periods of significant price movement. Margin required to be posted to the
exchanges is a function of the net open positions of our clients and the
required margin per contract. INTL FCStone Financial is subject to minimum
capital requirements under Section 4(f)(b) of the Commodity Exchange Act, Part
1.17 of the rules and regulations of the CFTC and the SEC Uniform Net Capital
Rule 15c3-1 under the Securities Exchange Act of 1934. These rules specify the
minimum amount of capital that must be available to support our clients' open
trading positions, including the amount of assets that INTL FCStone Financial
must maintain in relatively liquid form, and are designed to measure general
financial integrity and liquidity. INTL FCStone Financial is also subject to the
Rule 15c3-3 of the Securities Exchange Act of 1934, as amended ("Customer
Protection Rule").
INTL FCStone Ltd is regulated by the Financial Conduct Authority ("FCA"), the
regulator of the financial services industry in the U.K. and is subject to
regulations which impose regulatory capital requirements. INTL FCStone Ltd is a
member of various commodities and futures exchanges in the U.K. and Europe and
has the responsibility to meet margin calls at all exchanges on a daily basis
and intra-day basis, if necessary. INTL FCStone Ltd is required to be compliant
with the U.K.'s Individual Liquidity Adequacy Standards ("ILAS"). To comply with
these standards, we have implemented daily liquidity procedures, conduct
periodic reviews of liquidity by stressed scenarios, and have created liquidity
buffers.
INTL FCStone Pte Ltd holds a Capital Market Services License under the
Securities and Futures Act in Singapore to carry on the business of dealing in
capital markets products. The principal activity of INTL FCStone Pte Ltd is that
of providing commodity and futures brokering and risk advisory services. INTL
FCStone Pte Ltd is regulated by the Monetary Authority of Singapore, and is
subject to regulations which impose minimum base capital requirements and
requirements to meet certain percentages for risk requirement calculations.
In addition, in our physical commodities trading, commercial hedging OTC,
securities and foreign exchange trading activities, we may be called upon to
meet margin calls with our various trading counterparties based upon the
underlying open transactions we have in place with those counterparties.
We continuously review our overall credit and capital needs to ensure that our
capital base, both stockholders' equity and debt, as well as available credit
facilities can appropriately support the anticipated financing needs of our
operating subsidiaries.
As of March 31, 2020, we had total equity capital of $648.6 million, outstanding
loans under revolving credit facilities of $275.0 million, and $184.3 million
outstanding on our senior secured term loan, net of deferred financing costs.
A substantial portion of our assets are liquid. As of March 31, 2020,
approximately 98% of our assets consisted of cash; securities purchased under
agreements to resell; securities borrowed; deposits with and receivables from
broker-dealers, clearing organizations and counterparties; client receivables,
marketable financial instruments and investments, and physical commodities
inventory. All assets that are not client and counterparty deposits are financed
by our equity capital, bank loans, short-term borrowings from financial
instruments sold, not yet purchased and under repurchase agreements, securities
loaned, and other payables.
Client and Counterparty Credit and Liquidity Risk
Our operations expose us to credit risk of default of our clients and
counterparties. The risk includes liquidity risk to the extent our clients or
counterparties are unable to make timely payment of margin or other credit
support. These risks expose us indirectly to the financing and liquidity risks
of our clients and counterparties, including the risks that our clients and
counterparties may not be able to finance their operations.
As a clearing broker, we act on behalf of our clients for all trades consummated
on exchanges. We must pay initial and variation margin to the exchanges, on a
net basis, before we receive the required payments from our clients.
Accordingly, we are responsible for our clients' obligations with respect to
these transactions, which exposes us to significant credit risk. Our clients are
required to make any required margin deposits the next business day, and we
require our largest clients to make intra-day margin payments during periods of
significant price movement. Our clients are required to maintain initial margin
requirements at the level set by the respective exchanges, but we have the
ability to increase the margin requirements for clients based on their open
positions, trading activity, or market conditions.
With OTC derivative transactions, we act as a principal, which exposes us to the
credit risk of both our clients and the counterparties with which we offset our
client positions. As with exchange-traded transactions, our OTC transactions
require that we meet initial and variation margin payments on behalf of our
clients before we receive the required payment from our clients. OTC clients are
required to post sufficient collateral to meet margin requirements based on
Value-at-Risk models as well as variation margin requirement based on the price
movement of the commodity or security in which they transact. Our clients are
required to make any required margin deposits the next business day, and we may
require our largest clients to make intra-day margin payments during periods of
significant price movement. We have the ability to increase the margin
requirements for clients based on their open positions, trading activity, or
market conditions. On a limited basis, we provide credit thresholds to certain
clients, based on internal evaluations and monitoring of client
creditworthiness.

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In addition, with OTC transactions, we are at risk that a counterparty will fail
to meet its obligations when due. We would then be exposed to the risk that the
settlement of a transaction which is due a client will not be collected from the
respective counterparty with which the transaction was offset. We continuously
monitor the credit quality of our respective counterparties and mark our
positions held with each counterparty to fair value on a daily basis.
We enter into securities purchased under agreements to resell, securities sold
under agreements to repurchase, securities borrowed and securities loaned
transactions to, among other things, finance financial instruments, acquire
securities to cover short positions, acquire securities for settlement, and to
accommodate counterparties' needs. In connection with these agreements and
transactions, it is our policy 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 we may require counterparties to deposit additional collateral or
return collateral pledged, when appropriate.
In our Physical Commodities business, we act as a principal, which exposes us to
the credit risk of both our clients and our suppliers with which we offset our
client positions as well as provide financing to commercial commodity-related
companies against physical inventories. We mitigate this risk by securing
warehouse receipts and or insurance against potential default by either party.
Information related to bad debt expense for the three months ended March 31,
2020 and 2019 can be found in Note 7 of the Condensed Consolidated Financial
Statements.
Primary Sources and Uses of Cash
Our assets and liabilities may vary significantly from period to period due to
changing client requirements, economic and market conditions and our growth. Our
total assets as of March 31, 2020 and September 30, 2019, were $10.9 billion and
$9.9 billion, respectively. Our operating activities generate or utilize cash as
a result of net income or loss earned or incurred during each period and
fluctuations in our assets and liabilities. The most significant fluctuations
arise from changes in the level of client activity, commodities prices and
changes in the balances of financial instruments and commodities inventory. INTL
FCStone Financial and INTL FCStone Ltd occasionally utilize their margin line
credit facilities, on a short-term basis, to meet intraday settlements with the
commodity exchanges prior to collecting margin funds from their clients.
The majority of the assets of INTL FCStone Financial, INTL FCStone Ltd and INTL
FCStone Pte Ltd are restricted from being transferred to its parent or other
affiliates due to specific regulatory requirements. This restriction has no
impact on our ability to meet our cash obligations, and no impact is expected in
the future.
We have liquidity and funding policies and processes in place that are intended
to maintain significant flexibility to address both company-specific and
industry liquidity needs. As of March 31, 2020 and September 30, 2019, the
parent-holding company had cash and cash equivalents of $70.5 million and $2.0
million, respectively. The majority of our excess funds are held with
high-quality institutions, under highly liquid reverse repurchase agreements,
U.S. government obligations, interest earning cash deposits and AA-rated money
market investments.
As of March 31, 2020, we had $393.9 million in undistributed foreign earnings.
Repatriation of these amounts is not subject to additional U.S. federal income
tax but would be subject to applicable withholding taxes in the relevant
jurisdictions. The Company does not intend to distribute earnings in a taxable
manner, and therefore intends to limit distributions to earnings previously
taxed in the U.S., or earnings that would qualify for the 100 percent dividends
received deduction, and earnings that would not result in any significant
foreign taxes. The Company has repatriated $30.0 million during fiscal 2020 of
earnings previously taxed in the U.S. resulting in no significant taxes.
Therefore, the Company has not recognized a deferred tax liability on its
investment in foreign subsidiaries.
On February 22, 2019, the Company amended its $262.0 million senior secured
revolving credit facility, to extend the maturity date through February 2022,
and to increase the size of the facility to $350.0 million. During the six
months ended March 31, 2020, additional members were added to the syndication
further increasing the committed amount to $393.0 million.
As of March 31, 2020, we had four committed bank credit facilities, totaling
$766.5 million, of which $454.3 million was outstanding. Additional information
regarding our bank credit facilities can be found in Note 11 of the Condensed
Consolidated Financial Statements. The credit facilities include:
•      A three-year syndicated loan facility, which includes a $196.5 million

revolving credit facility and a $196.5 million Term Loan, committed until

February 22, 2022, under which we are entitled to borrow up to $381.5

million, subject to certain terms and conditions of the credit agreement.

This credit facility will continue to be used to finance the Company's

working capital requirements and capital expenditures. The credit facility

is secured by a first priority lien on substantially all of the assets of

the Company and those of our subsidiaries that guarantee the credit

facility. The Company is required to make quarterly principal payments

       against the Term Loan equal to 1.25% of the original balance with the
       remaining balance due on the maturity date. Amounts repaid on the Term
       Loan may not be reborrowed.



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• An unsecured syndicated loan facility, committed until April 2, 2021,

under which our subsidiary, INTL FCStone Financial is entitled to borrow

up to $75.0 million, subject to certain terms and conditions of the credit

       agreement. This facility is intended to provide short-term funding of
       margin to commodity exchanges as necessary.

• A syndicated loan facility, committed until January 29, 2022, under which

our subsidiary, FCStone Merchant Services, LLC is entitled to borrow up to

$260.0 million, subject to certain terms and conditions of the credit

       agreement. The loan proceeds are used to finance commodity financing
       arrangements and commodity repurchase agreements.

• An unsecured syndicated loan facility, committed until July 14, 2020,

under which our subsidiary, INTL FCStone Ltd is entitled to borrow up to

       $50.0 million, subject to certain terms and conditions of the credit
       agreement. This facility is intended to provide short-term funding of
       margin to commodity exchanges as necessary.


As reflected above, $125.0 million of our committed credit facilities are
scheduled to expire during the 12-month period beginning with the filing date of
this Quarterly Report on Form 10-Q. We intend to renew or replace these
facilities as they expire, and based on our liquidity position and capital
structure, we believe we will be able to do so.
As of March 31, 2020, we had three uncommitted bank credit facilities with an
outstanding balance of $5.0 million. The credit facilities include:
•      A secured uncommitted loan facility under which INTL FCStone Financial may

borrow up to $75.0 million, collateralized by commodities warehouse

receipts, to facilitate U.S. commodity exchange deliveries of its clients,

subject to certain terms and conditions of the credit agreement.

• A secured uncommitted loan facility under which INTL FCStone Financial may

borrow up to $100.0 million for short term funding of firm and client

margin requirements, subject to certain terms and conditions of the

agreement. The borrowings are secured by first liens on firm owned

marketable securities or client owned securities which have been pledged

to us under a clearing arrangement.

• A secured uncommitted loan facility under which INTL FCStone Financial may

borrow requested amounts for short term funding of firm and client margin

requirements. 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. The borrowings are secured by first liens on
       firm owned marketable securities or client owned securities which have
       been pledged to us under a clearing arrangement.


Our credit facility agreements contain certain financial covenants relating to
financial measures on a consolidated basis, as well as on a certain stand-alone
subsidiary basis, including minimum 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 any such covenants could result in the debt becoming payable on
demand. As of March 31, 2020, we and our subsidiaries are in compliance with all
of the financial covenants under our credit facilities.
In accordance with required disclosure as part of our three-year syndicated
revolving loan facility, during the trailing twelve months ended March 31, 2020,
interest expense directly attributable to trading activities includes $67.5
million in connection with trading activities conducted as an institutional
dealer in fixed income securities, and $37.6 million in connection with
securities lending activities.
Other Capital Considerations
Our activities are subject to various significant governmental regulations and
capital adequacy requirements, both in the U.S. and in the international
jurisdictions in which we operate. Certain other of our non-U.S. subsidiaries
are also subject to capital adequacy requirements promulgated by authorities of
the countries in which they operate.
Our subsidiaries are in compliance with all of their capital regulatory
requirements as of March 31, 2020. Additional information on these net capital
and minimum net capital requirements can be found in Note 14 of the Condensed
Consolidated Financial Statements.
The Dodd-Frank Act created a comprehensive new regulatory regime governing the
OTC swaps and imposed further regulations on listed derivatives. The Dodd-Frank
Act also created a registration regime for new categories of market
participants, such as "swap dealers", among others.
The Dodd-Frank Act generally introduced a framework for (i) swap data reporting
and record keeping on counterparties and data repositories; (ii) centralized
clearing for swaps, with limited exceptions for end-users; (iii) the requirement
to execute swaps on regulated swap execution facilities; (iv) imposition on swap
dealers to exchange margin on uncleared swaps with counterparties; and (v) the
requirement to comply with new capital rules.
Our subsidiary, INTL FCStone Markets, LLC, is a CFTC provisionally registered
swap dealer. During 2016, CFTC 23.154, Calculation of Initial Margin rules came
into effect, imposing new requirements on registered swap dealers (such as our

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subsidiary, INTL FCStone Markets, LLC) and certain counterparties to exchange
initial margin, with phased-in compliance dates, with INTL FCStone Markets, LLC
falling in the final compliance date tier of September 2021. We will continue to
monitor all applicable developments in the ongoing implementation of the
Dodd-Frank Act.
Cash Flows
We include client cash and securities segregated for regulatory purposes in our
consolidated cash flow statements.We hold a significant amount of U.S.Treasury
obligations which represent investment of client funds or client-owned
investments pledged in lieu of cash margin. U.S.Treasury securities held with
third-party banks or pledged with exchange-clearing organizations representing
investments of client funds or which are held for particular clients in lieu of
cash margin are included in the beginning and ending cash balances reconciled on
our consolidated statements of cash flows to the extent that they have an
original or acquired maturity of 90 days or less and, therefore, meet the
definition of a segregated cash equivalent. Purchases and sales of U.S.Treasury
securities representing investment of clients' funds and U.S.Treasury
securities pledged or redeemed by particular clients in lieu of cash margin are
presented as operating uses and sources of cash, respectively, within the
operating section of the consolidated statements of cash flows if they have an
original or acquired maturity of greater than 90 days. Typically, there is an
offsetting use or source of cash related to the change in the payables to
clients. However, we will report a use of cash in periods where segregated U.S.Treasury securities that meet the aforementioned definition of a segregated cash
equivalent mature and are replaced with U.S.Treasury securities that have
original or acquired maturities that are greater than 90 days.
Our cash, segregated cash, cash equivalents, and segregated cash equivalents
increased from $2,451.3 million as of September 30, 2019 to $3,690.4 million as
of March 31, 2020, a net increase of $1,239.1 million. Net cash of $1,170.0
million was provided by operating activities, $12.3 million was used in
investing activities and net cash of $84.1 million was provided by financing
activities, which included a $21.5 million source of financing cash flows
related to the issuance of the senior secured term loan, partially offset by
required quarterly principal payments of $4.9 million made during the six months
ended March 31, 2020. There was a financing cash inflow related to net
borrowings on our revolving lines of credit with maturities of 90 days or less
of $111.6 million during the six months ended March 31, 2020, which increased
payables to lenders under loans. There was a financing cash outflow related to
the repayments on our revolving line of credit with maturities of greater than
90 days which exceeded our borrowings in the amount of $38.5 million, which
decreased payables to lenders under loans. Fluctuations in exchange rates
decreased our cash, segregated cash, cash equivalents and segregated cash
equivalents by $2.7 million.
In the broker-dealer and related trading industries, companies report trading
activities in the operating section of the statement of cash flows. Due to the
daily price volatility in the commodities market, as well as changes in margin
requirements, fluctuations in the balances of deposits held at various
exchanges, marketable securities and client commodity accounts may occur from
day-to-day. A use of cash, as calculated on the consolidated statement of cash
flows, includes unrestricted cash transferred and pledged to the exchanges or
guarantee funds. These funds are held in interest-bearing deposit accounts at
the exchanges, and based on daily exchange requirements, may be withdrawn and
returned to unrestricted cash. Additionally, within our unregulated OTC and
foreign exchange operations, cash deposits received from clients are reflected
as cash provided from operations. Subsequent transfer of these cash deposits to
counterparties or exchanges to margin their open positions will be reflected as
an operating use of cash to the extent the transfer occurs in a different period
than the cash deposit was received.
We continuously evaluate opportunities to expand our business. Investing
activities include $4.5 million in capital expenditures for property and
equipment during the current six months ended compared to $7.3 million during
the prior year. Fluctuations in capital expenditures are primarily due to the
timing of purchases of IT equipment and trade and non-trade system software as
well as the timing on leasehold improvement projects. Investing activities also
include $7.8 million in cash payments, net of cash received, for the acquisition
of businesses during the current six months ended as well as during the prior
year. Further information about business acquisitions is contained in Note 18 to
the Condensed Consolidated Financial Statements.
During the six months ended March 31, 2020, we repurchased 200,000 shares of our
outstanding common stock in open market transactions, for an aggregate purchase
price of $7.5 million. During the six months ended March 31, 2019, we had no
repurchases of our outstanding common stock.
Apart from what has been disclosed above, there are no known trends, events or
uncertainties that have had or are likely to have a material impact on our
liquidity, financial condition and capital resources. Based upon our current
operations, we believe that cash flows from operations, available cash and
available borrowings under our credit facilities will be adequate to meet our
future liquidity needs.

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Commitments

Information about our commitments and contingent liabilities is contained in
Note 13 of the Condensed Consolidated Financial Statements.
Off Balance Sheet Arrangements
We are party to certain financial instruments with off-balance sheet risk in the
normal course of business as a registered securities broker-dealer, futures
commission merchant, U.K. based financial services firm, provisionally
registered swap dealer and from our market-making and proprietary trading in the
foreign exchange, commodities and debt security markets. These financial
instruments include futures, forward and foreign exchange contracts,
exchange-traded and OTC options, To Be Announced ("TBA") securities and interest
rate swaps. 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 our positions,
as well as the volatility and liquidity in the markets in which the financial
instruments are traded. The principal risk components of financial instruments
include, among other things, interest rate volatility, the duration of the
underlying instruments and changes in commodity pricing and foreign exchange
rates. We attempt to manage our exposure to market risk through various
techniques. Aggregate market limits have been established and market risk
measures are routinely monitored against these limits. Derivative contracts are
traded along with cash transactions because of the integrated nature of the
markets for such products. We manage the risks associated with derivatives on an
aggregate basis along with the risks associated with our proprietary trading and
market-making activities in cash instruments as part of our firm-wide risk
management policies.
A significant portion of these instruments are primarily the execution of orders
for commodity futures and options on futures contracts on behalf of our clients,
substantially all of which are transacted on a margin basis. Such transactions
may expose us to significant credit risk in the event margin requirements are
not sufficient to fully cover losses which clients may incur. We control the
risks associated with these transactions by requiring clients to maintain margin
deposits in compliance with both clearing organization requirements and internal
guidelines. We monitor required margin levels daily and, therefore, may require
clients to deposit additional collateral or reduce positions when necessary. We
also establish contract limits for clients, which are monitored daily. We
evaluate each client's creditworthiness on a case-by-case basis. Clearing,
financing, and settlement activities may require us to maintain funds with or
pledge securities as collateral with other financial institutions. Generally,
these exposures to exchanges are subject to netting of open positions and
collateral, while exposures to clients are subject to netting, per the terms of
the client agreements, which reduce the exposure to us by permitting receivables
and payables with such clients to be offset in the event of a client default.
Management believes that the margin deposits held as of March 31, 2020 are
adequate to minimize the risk of material loss that could be created by
positions held at that time. Additionally, we monitor collateral fair value on a
daily basis and adjust collateral levels in the event of excess market exposure.
Generally, these exposures to both counterparties and clients are subject to
master netting agreements and the terms of the client agreements, which reduce
our exposure.
As a broker-dealer in U.S.Treasury obligations, U.S. government agency
obligations, agency mortgage-backed obligations, and asset-backed obligations,
we are engaged in various securities trading, borrowing and lending activities
serving solely institutional counterparties. Our exposure to credit risk
associated with the nonperformance of counterparties in fulfilling their
contractual obligations pursuant to these securities transactions and market
risk associated with the sale of securities not yet purchased can be directly
impacted by volatile trading markets which may impair their ability to satisfy
outstanding obligations to us. In the event of non-performance and unfavorable
market price movements, we may be required to purchase or sell financial
instruments, which may result in a loss to us.
We transact OTC and foreign exchange contracts with our clients, and our OTC and
foreign exchange trade desks will generally offset the client's transaction
simultaneously with one of our trading counterparties or will offset that
transaction with a similar, but not identical, position on the exchange. These
unmatched transactions are intended to be short-term in nature and are conducted
to facilitate the most effective transaction for our client.
Additionally, we hold options and futures on options contracts resulting from
market-making and proprietary trading activities in these product lines. We
assist clients in our commodities trading business to protect the value of their
future production (precious or base metals) by selling them put options on an
OTC basis. We also provide our physical commodities trading business clients
with sophisticated option products, including combinations of buying and selling
puts and calls. We mitigate our risk by effecting offsetting options with market
counterparties or through the purchase or sale of exchange-traded commodities
futures.
As part of the activities discussed above, we carry short positions. We sell
financial instruments that we do not own, borrow the financial instruments to
make good delivery, and therefore are obliged to purchase such financial
instruments at a future date in order to return the borrowed financial
instruments. We record these obligations in the condensed consolidated financial

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statements as of March 31, 2020 and September 30, 2019, at fair value of the
related financial instruments, totaling $703.6 million and $714.8 million,
respectively. These positions are held to offset the risks related to financial
assets owned, and reported in our condensed consolidated balance sheets in
'financial instruments owned, at fair value', and 'physical commodities
inventory, net'. We will incur losses if the fair value of the financial
instruments sold, not yet purchased, increases subsequent to March 31, 2020,
which might be partially or wholly offset by gains in the value of assets held
as of March 31, 2020. The totals of $703.6 million and $714.8 million include a
net liability of $152.8 million and $58.1 million for derivatives, based on
their fair value as of March 31, 2020 and September 30, 2019, respectively.
We do not anticipate non-performance by counterparties in the above situations.
We have a policy of reviewing the credit standing of each counterparty with
which we conduct business. We have credit guidelines that limit our current and
potential credit exposure to any one counterparty. We administer limits, monitor
credit exposure, and periodically review the financial soundness of
counterparties. We manage the credit exposure relating to our trading activities
in various ways, including entering into collateral arrangements and limiting
the duration of exposure. Risk is mitigated in certain cases by closing out
transactions and entering into risk reducing transactions.
We are a member of various exchanges that trade and clear futures and option
contracts. We are also a member of and provide guarantees to securities
clearinghouses and exchanges in connection with client trading activities.
Associated with our memberships, we may be required to pay a proportionate share
of the financial obligations of another member who may default on its
obligations to the exchanges. While the rules governing different exchange
memberships vary, in general our guarantee obligations would arise only if the
exchange had previously exhausted its resources. In addition, any such guarantee
obligation would be apportioned among the other non-defaulting members of the
exchange. Our liability under these arrangements is not quantifiable and could
exceed the cash and securities we have posted as collateral at the exchanges.
However, management believes that the potential for us to be required to make
payments under these arrangements is remote. Accordingly, no contingent
liability for these arrangements has been recorded in the condensed consolidated
balance sheets as of March 31, 2020 and September 30, 2019.
Effects of Inflation
Because our assets are, to a large extent, liquid in nature, they are not
significantly affected by inflation. Increases in our expenses, such as
compensation and benefits, transaction-based clearing expenses, occupancy and
equipment rental, due to inflation, may not be readily recoverable from
increasing the prices of our services. While rising interest rates are generally
favorable for us, to the extent that inflation has other adverse effects on the
financial markets and on the value of the financial instruments held in
inventory, it may adversely affect our financial position and results of
operations.
Critical Accounting Policies
See our critical accounting policies discussed in the Management's Discussion
and Analysis of the most recent Annual Report filed on Form 10-K. There have
been no material changes to these policies.
Accounting Development Updates
In December 2019, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes. This ASU removes certain exceptions
for recognizing deferred taxes for investments, performing intraperiod
allocation and calculating income taxes in interim periods. The ASU also adds
guidance to reduce complexity in certain areas, including recognizing deferred
taxes for tax goodwill and allocating taxes to members of a consolidated group.
We intend to adopt this guidance during the first quarter of fiscal year 2022.
We are currently evaluating the impact that this new guidance will have on our
consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on
Financial Instruments, which significantly changes the ways companies recognize
credit losses on financial instruments. In November 2019, the FASB issued ASU
2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit
Losses, which includes several amendments to ASU 2016-13, including amendments
to the reporting of expected credit losses. In May 2019, the FASB issued ASU
2019-05, which provides companies with more flexibility in applying the fair
value option upon the adoption of ASU 2016-13. In April 2019, the FASB issued
ASU 2019-04, which included certain amendments to ASU 2016-13, including a
change to how companies consider expected recoveries and contractual extensions
or renewal options when estimating expected credit losses. We expect to adopt
this guidance starting with the first quarter of fiscal year 2021. The guidance
introduces a new credit reserving model known as the Current Expected Credit
Loss ("CECL") model, which is based on expected losses, and differs
significantly from the incurred loss approach used today. The CECL model
requires measurement of expected credit losses not only based on historical
experience and current conditions, but also by including reasonable and
supportable forecasts incorporating forward-looking information and will likely
result in earlier recognition of credit reserves. The Company has undertaken a
process of identifying and developing the changes to the Company's existing
models and processes that will be required under CECL. The ASU is expected to
impact only those financial instruments that are carried by the Company at

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amortized cost such as collateralized financing arrangements (repurchase
agreements and securities borrowing/lending transactions) and certain
receivables from clients, broker-dealers, and clearing organizations. The
Company is continuing to evaluate the impact that this new guidance will have on
our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Credit Risk
See Note 6 to the Condensed Consolidated Financial Statements, 'Financial
Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk'.
Market Risk
We conduct our market-making and trading activities predominantly as a
principal, which subjects our capital to significant risks. These risks include,
but are not limited to, absolute and relative price movements, price volatility
and changes in liquidity, over which we have virtually no control. Our exposure
to market risk varies in accordance with the volume of client-driven
market-making transactions, the size of the proprietary positions and the
volatility of the financial instruments traded.
We seek to mitigate exposure to market risk by utilizing a variety of
qualitative and quantitative techniques:
• Diversification of business activities and instruments;


• Limitations on positions;

• Allocation of capital and limits based on estimated weighted risks; and

• Daily monitoring of positions and mark-to-market profitability.

We utilize derivative products in a trading capacity as a dealer to satisfy client needs and mitigate risk. We manage risks from both derivatives and non-derivative cash instruments on a consolidated basis. The risks of derivatives should not be viewed in isolation, but in aggregate with our other trading activities.

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Management believes that the volatility of revenues is a key indicator of the
effectiveness of our risk management techniques. The graph below summarizes
volatility of our daily revenue, determined on a marked-to-market basis, during
the six months ended March 31, 2020.[[Image Removed: mtmrev03312020.jpg]]
In our Securities market-making and trading activities, we maintain inventories
of equity and debt securities. In our Physical Commodities segment, our
positions include physical commodities inventories, precious metals on lease,
forwards, futures and options on futures, and OTC derivatives. Our commodity
trading activities are managed as one consolidated book for each commodity
encompassing both cash positions and derivative instruments. We monitor the
aggregate position for each commodity in equivalent physical ounces, metric tons
or other relevant unit.
Interest Rate Risk
In the ordinary course of our operations, we have interest rate risk from the
possibility that changes in interest rates will affect the values of financial
instruments and impact interest income earned. Within our domestic institutional
dealer in fixed income securities business, we maintain a significant amount of
trading assets and liabilities which are sensitive to changes in interest rates.
These trading activities primarily consist of securities trading in connection
with U.S.Treasury, U.S. government agency, agency mortgage-backed and agency
asset-backed obligations as well as investment grade, high-yield, convertible
and emerging market debt securities. Derivative instruments, which consist of
futures, TBA securities and forward settling transactions, are used to manage
risk exposures in the trading inventory. We enter into TBA securities
transactions for the sole purpose of managing risk associated with
mortgage-backed securities.
In addition, we generate interest income from the positive spread earned on
client deposits. We typically invest in U.S.Treasury bills, notes, and
obligations issued by government sponsored entities, reverse repurchase
agreements involving U.S.Treasury bills and government obligations or AA-rated
money market funds. In some instances, we maintain interest earning cash
deposits with banks, clearing organizations and counterparties. We have an
investment policy which establishes acceptable standards of credit quality and
limits the amount of funds that can be invested within a particular fund,
institution, clearing organization and counterparty.
We manage interest expense using a combination of variable and fixed rate debt
as well as including the average outstanding borrowings in our calculations of
the notional value of interest rate swaps to be entered into as part of our
interest rate management strategy discussed above. The debt instruments are
carried at their unpaid principal balance which approximates fair value. As of
March 31, 2020, $459.3 million of our debt was variable-rate debt. We are
subject to earnings and liquidity risks for changes in the interest rate on this
debt. As of March 31, 2020, we had no outstanding fixed-rate long-term debt.

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