STONEX GROUP INC. Throughout this document, unless the context otherwise requires, the terms "Company", "we", "us" and "our" refer toStoneX Group Inc. and its consolidated subsidiaries.StoneX Group Inc. , formerlyINTL FCStone Inc. , is aDelaware 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 the Company, 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 andU.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, except as required by law. We caution readers that any forward-looking statements are not guarantees of future performance. Overview OnJune 24, 2020 , we announced the rebranding of our firm asStoneX Group Inc. , following approval by an overwhelming majority of our shareholders during a shareholder meeting held the same day. The name change was effectiveJuly 6, 2020 , and additionally our common stock is now traded under the symbol SNEX. TheStoneX Group Inc. name and its trade name "StoneX" carry forward the foundation established bySaul Stone in 1924 to today's modern financial services firm. Today, we provide an institutional-grade financial services ecosystem connecting our clients to 36 derivatives exchanges, 175 foreign exchange markets, nearly every global securities marketplace, and a number of bi-lateral liquidity venues via our network of highly integrated digital platforms and experienced professionals. Our platform delivers support throughout the entire lifecycle of a transaction, from consulting and boots-on-the-ground intelligence, to efficient execution, to post-trade clearing, custody and settlement. 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 2,200 employees as ofJune 30, 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 andPhysical 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 Beginning in the second quarter of fiscal 2020 and continuing through the third quarter of fiscal 2020, worldwide social and economic activity became severely impacted by the spread and threat of coronavirus ("COVID-19"). InMarch 2020 , COVID-19 was recognized as a global pandemic and has spread to many regions of the world, including all countries in which we have operations. The response by governments and societies to the COVID-19 pandemic, which include 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 significant market volatility and unprecedented market conditions. Our third quarter results continue to reflect strong revenue growth inEquity and Debt Capital Markets primarily related to increased customer 36
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flow to our equity market making desk and a widening of spreads in fixed income products as a result of periods of high volatility in the global markets due to economic concerns related to the COVID-19 pandemic. We have also seen a growth in operating revenues driven by increased customer activity in our 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 ofJune 30, 2020 , we had$69.5 million of committed funds available under our credit facility for general working capital requirements. We 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 Clients Our top priority is to service and care for our current clients. During this period of highly volatile markets, we have worked to prudently manage or reduce market risk exposures. 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 and continuing 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. Closing of$350 Million of Senior Secured Notes Due 2025 and Subsequent Closing of Gain Acquisition OnJune 11, 2020 , we closed on the previously-announced offering of$350 million in aggregate principal amount of 8.625% Senior Secured Notes due 2025 (the "Notes") at the offering price of 98.5% of the aggregate principal amount thereof. As previously disclosed, we used the net proceeds from the sale of the Senior Secured Notes to (1) fund the cash consideration for the merger of our wholly-owned subsidiary and Gain, with Gain surviving as our wholly-owned subsidiary, pursuant to the Agreement and Plan of Merger dated as ofFebruary 26, 2020 and approved by Gain's stockholders onJune 5, 2020 and (2) pay certain related transaction fees and expenses, and we intend to use the remaining proceeds, together with cash on hand, to (3) fund the repayment of Gain's 5.00% Convertible Senior Notes due 2022. OnJuly 31, 2020 , we completed our previously announced acquisition of Gain, an online provider of retail foreign exchange trading and related services. Gain is a provider of innovative trading technology and execution services to retail and institutional investors worldwide, with multiple access points to OTC markets and global exchanges across a wide range of asset classes, including foreign exchange, commodities and global equities. OptionSellers During the week endedNovember 16, 2018 , balances in approximately 300 client accounts of the futures commission merchant ("FCM") division of our wholly owned subsidiary,StoneX Financial Inc. , 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 byOptionSellers.com Inc. ("OptionSellers"), an independent Commodity Trading Advisor ("CTA"), were liquidated in accordance with theStoneX Financial Inc.'s client agreements and obligations under market regulation standards. A CTA is registered with theU.S. Commodity Futures Trading Commission ("CFTC") and a member of, and subject to audit by, theNational 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, whileStoneX Financial Inc. acted solely as the clearing firm in its role as the FCM. 37
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StoneX Financial Inc.'s client agreements hold account holders liable for all losses in their accounts and obligate the account holders to reimburseStoneX Financial Inc. for any account deficits in their accounts. As ofJune 30, 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 .StoneX Financial Inc. 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. 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. We do not currently believe that any potential losses related to this matter would materially and adversely impact our ability to comply with our ongoing liquidity, capital, and regulatory requirements. Executive Summary The third quarter of fiscal 2020 was a period in which we saw the continued effect of the COVID-19 pandemic on the global economy with heightened volatility and customer demand driving improved performance in our equity, debt and precious metals businesses which was partially offset by the effect of the economic slowdown on commodity prices and short-term interest rates resulting in lower performance in Commercial Hedging and Clearing and Execution Services. Combined, this resulted in$322.6 million of operating revenues for the current quarter, an increase of$39.2 million , or 14% compared to the prior year. The growth in operating revenues was led by our Securities segment, which added$48.8 million versus the prior year, andPhysical Commodities added$24.5 million , while partially offset by Commercial Hedging decreasing$21.3 million , Clearing and Execution Services decreasing$10.0 million and Global Payments decreasing$1.5 million in operating revenues compared to the prior year. Overall, segment income increased$41.1 million or 59% compared to the prior year to$110.7 million in the third quarter. Securities segment income increased$43.4 million or 529%, versus the prior year, asEquity Capital Markets saw volumes increase 83% andDebt Capital Markets saw spreads widen 22%, adding$24.7 million and$19.4 million in segment income, respectively, compared to the prior year.Physical Commodities segment income increased$17.5 million to$20.3 million in the third quarter versus the prior year. This was primarily driven by a$18.0 million increase inPrecious Metals segment income as well as a$0.5 million decrease in segment income in our Physical Ag & Energy business. Commercial Hedging segment income decreased 35%, to$19.2 million , as a result of 14% and 32% declines in exchange-traded and over-the-counter ("OTC") transactional revenues, respectively as well as a$5.2 million decline in interest income. CES segment income decreased 69%, or$8.2 million versus the prior year primarily as a result of$4.4 million and$3.0 million decreases in Exchange-Traded Futures & Options and Correspondent Clearing segment income, respectively, each of which were primarily driven by lower short-term interest rates. In addition, Derivative Voice Brokerage segment income declined$1.1 million while Independent Wealth Management segment income decreased$0.2 million compared to the prior year. These declines were partially offset by a$0.5 million increase FX Prime Brokerage segment income. Global Payments segment income decreased$1.1 million or 6% compared to the prior year, primarily as a result of the decrease in operating revenues which was partially offset by a decline in non-variable direct expenses. 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 61% of total expenses in the current period compared to 59% in the prior year period. Non-variable expenses, excluding bad debts increased$9.1 million , or 10%, period-over-period, as an incremental$5.1 million was related to new acquisitions and new business initiatives began sinceJune 2019 . Bad debt expense increased$1.3 million period-over-period. For the third quarter of fiscal 2020, we recorded net income of$36.6 million compared to$16.3 million in the prior year period. 38
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Selected Summary Financial Information Results of Operations Total revenues reported combine gross revenues for the physical commodities business and net revenues for all other businesses. In order to reflect the way that we view the results, the table below reflects the calculation of the subtotal 'operating revenues', which is calculated by deducting cost of sales of physical commodities from total revenues. Set forth below is our discussion of the results of our operations, as viewed by management, for the three and nine month periods endedJune 30, 2020 and 2019. Financial Information (Unaudited) Three Months Ended June 30, Nine Months Ended June 30, (in millions) 2020 % Change 2019 2020 % Change 2019 Revenues: Sales of physical commodities$ 7,944.5 5 %$ 7,599.3 $ 38,939.4 87 %$ 20,824.6 Principal gains, net 161.0 57 % 102.3 442.0 45 % 305.4 Commission and clearing fees 96.1 (1 )% 97.5 299.9 6 % 282.1 Consulting, management, and account fees 19.4 (6 )% 20.7 63.3 7 % 58.9 Interest income 22.4 (58 )% 53.2 110.1 (25 )% 146.4 Total revenues 8,243.4 5 % 7,873.0 39,854.7 84 % 21,617.4 Cost of sales of physical commodities 7,920.8 4 % 7,589.6 38,888.5 87 % 20,798.2 Operating revenues 322.6 14 % 283.4 966.2 18 % 819.2 Transaction-based clearing expenses 55.3 21 % 45.7 165.4 19 % 138.5 Introducing broker commissions 24.0 (19 )% 29.6 79.8 (8 )% 87.0 Interest expense 15.4 (64 )% 42.5 79.2 (30 )% 113.9 Net operating revenues 227.9 38 % 165.6 641.8 34 % 479.8 Compensation and benefits 132.5 31 % 100.9 373.2 30 % 287.9 Bad debts 1.8 260 % 0.5 6.2 313 % 1.5 Recovery of bad debt on physical coal - - - - (100 )% (2.4 ) Other expenses 44.6 5 % 42.6 135.7 12 % 121.3 Total compensation and other expenses 178.9 24 % 144.0 515.1 26 % 408.3 Other gain - - - 0.1 (98 )% 5.4 Income before tax 49.0 127 % 21.6 126.8 65 % 76.9 Income tax expense 12.4 134 % 5.3 34.6 82 % 19.0 Net income$ 36.6 125 %$ 16.3 $ 92.2 59 % $ 57.9 Balance Sheet information: June 30, 2020 % Change June 30, 2019 Total assets$ 12,389.5 23 %$ 10,054.9 Payables to lenders under loans $ 313.8 (7 )%$ 337.7 Senior secured tern loan, net $ 518.9 206 %$ 169.7 Stockholders' equity $ 688.8 21 %$ 570.5 39
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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 June 30 ,
Nine Months Ended
2020 % Change 2019 2020 % Change 2019
Volumes and Other Data:
Exchange-traded - futures and
options (contracts, 000's) 37,627.4 18 % 31,765.5 119,299.3 21 % 98,352.9
OTC (contracts, 000's) 539.5 4 % 518.0 1,638.0 25 % 1,310.8
Global Payments (# of payments,
000's) 194.8 11 % 174.9 592.9 18 % 504.3
Gold equivalent ounces traded
(000's) 101,596.1 13 % 90,283.7 330,429.8 26 % 263,224.4
Equity Capital Markets (gross
dollar volume, millions) $ 64,606.3 83 % $ 35,355.5 $ 191,490.5 65 % $ 115,903.0
Debt Capital Markets (gross
dollar volume, millions) $ 46,596.0 8 % $ 43,094.6 $ 138,411.7 (15 )% $ 162,001.9
FX Prime Brokerage volume (U.S.
notional, millions) $ 58,300.5 (30 )% $ 83,469.9 $ 262,650.8 3 % $ 253,850.2
Average assets under management
in Argentina (U.S. dollar
equivalents, millions) $ 326.6 (7 )% $ 351.5 $ 313.2 (4 )% $ 327.2
Average client equity - futures
and options (U.S. dollar,
millions) $ 3,026.5 57 % $ 1,927.3 $ 2,576.2 25 % $ 2,065.4
Average money market / FDIC
sweep client balances (U.S.
dollar, millions) $ 1,260.5 64 % $ 769.3 $ 1,066.3 38 % $ 771.2
Operating Revenues
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Operating revenues increased 14% to $322.6 million in the third quarter compared
to $283.4 million in the prior year. The growth in operating revenues was led by
our Securities and Physical Commodities segments which added $48.8 million and
$24.5 million , respectively, versus the prior year. This growth in operating
revenue was partially offset by declines of $21.3 million and $10.0 million in
Commercial Hedging and Clearing and Execution Services segments, respectively.
In addition, operating revenues in our Global Payments segment declined $1.5
million compared to the prior year.
Operating revenues in our Securities segment increased 66% compared to the prior
year to a record $123.0 million in the third quarter. Both the Equity and Debt
Capital Markets saw strong operating revenue growth, adding $36.9 million and
$13.0 million , respectively, compared to the prior year. This growth was driven
by continued periods of high volatility and increased customer demand in both
the global equity and fixed income markets, resulting from economic concerns
related to the COVID-19 pandemic. Equity Capital Markets saw an 83% increase in
the gross dollar volume traded and a 68% increase in the revenue per $1,000
traded while the Debt Capital Markets saw an 8% increase in the principal dollar
volume traded and a 22% increase in the revenue per $1,000 traded. Asset
Management operating revenues declined $1.1 million compared to the prior year
period.
Operating revenues in our Physical Commodity segment increased 167% to $39.2
million . This increase was driven by a $24.1 million increase in Precious Metals
operating revenues, as the number of gold equivalent ounces traded increased 13%
versus the prior year and the average revenue per ounce traded increased 288%.
Operating revenues in our Physical Ag & Energy business increased $0.4 million
versus the prior year, primarily driven by an increase in activity in our
biodiesel feedstock activities.
Operating revenues in Commercial Hedging decreased 25% compared to the prior
year to $65.1 million as a result of a $6.1 million decline in exchange-traded
transactional revenues as well as a $10.1 million decline in OTC revenues versus
the prior year. Exchange-traded volumes declined 20% versus the prior year while
OTC volumes increased 4%. Interest income declined $5.2 million , despite a 24%
increase in average client equity to $1.1 billion , as a result of the decline in
short-term interest rates.
Operating revenues in our CES segment decreased 13% to $68.9 million in the
third quarter. Exchange-Traded Futures & Options revenues declined 5% to $36.7
million , as an increase in commission and clearing fee revenue, driven by a 32%
increase in contract volumes, was more than offset by a $6.1 million decline in
interest income. FX Prime Brokerage operating revenues increased $0.8 million ,
despite a 30% decline in volumes compared to the prior year. Operating revenues
in our Correspondent Clearing business declined $3.6 million compared to the
prior year, to $5.2 million while Independent Wealth Management operating
revenues declined $0.9 million to $19.1 million in the third quarter. Both
Correspondent Clearing and Independent Wealth Management declines were driven by
a decline in short-term interest rates. Operating revenues in Derivative Voice
Brokerage declined $4.4 million versus the prior year period.
Operating revenues in our Global Payments segment decreased 5% in the third
quarter to $27.4 million , as an 11% increase in the number of global payments
was more than offset by a 16% decline in average revenue per trade compared to
the prior year.
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See Segment Information below for additional information on activity in each of the segments. Nine Months EndedJune 30, 2020 Compared to Nine Months EndedJune 30, 2019 Operating revenues increased 18% to$966.2 million in the current nine months ended compared to$819.2 million in the prior year. All segments of our business achieved growth in operating revenues versus the prior year with the exception of Clearing and Execution Services. This growth was led by our Securities andPhysical Commodities segments, which added$106.2 million and$34.5 million , respectively, versus the prior year period. In addition, our Commercial Hedging segment added$9.7 million , while Global Payments added$2.2 million . Operating revenues in Clearing and Execution Services declined$6.4 million compared to the prior year. Operating revenues in our Securities segment increased 49% to$322.0 million in the current nine months ended compared to the prior year.The Equity Capital Markets business increased 62%, to$171.7 million , as the gross dollar volume traded increased 65% as a result of increased market volatility and market share. Operating revenues in ourDebt Capital Markets business increased 40%, to$145.8 million versus the prior year, driven by an 64% increase in the revenue per$1,000 traded compared to the prior year. Asset Management operating revenues declined 22%, to$4.5 million in the current nine months ended, as the average assets under management inArgentina declined 4%. OurPhysical Commodities segment operating revenues increased 71% to$83.3 million in the current nine months ended, as a result of a$31.6 million increase inPrecious Metals operating revenues driven by increased customer demand as of result of global economic concerns surrounding the COVID-19 pandemic as well as the acquisition ofCoinInvest GmbH andEuropean Precious Metal Trading GmbH in the third quarter of fiscal 2019. In addition, Physical Ag & Energy operating revenues increased$2.9 million compared to the prior year period. Operating revenues in Commercial Hedging increased 4% to$236.5 million in the current nine months ended. Exchange-traded revenues increased$3.3 million as a result of a 5% increase in exchange-traded volumes, while a 25% increase in OTC volumes drove a$15.0 million increase in OTC revenues compared to the prior year. Interest income declined$9.4 million versus the prior year as a result of a decline in short-term interest rates, while average client equity increased 5% to$988.6 million in the current nine months ended. Global payment segment operating revenues increased 3%, to 88.2 million in the current nine months ended, as a result of an 18% increase in the number of payments made compared to the prior year, while the average revenue per payment declined 13% compared to the prior year. Operating revenues in our CES segment declined 3% to$241.3 million in the current nine months ended compared to the prior year. Exchange-Traded Futures & Options operating revenues increased 1% versus the prior year to$125.2 million , as exchange-traded commission and clearing fee revenues increased$10.8 million , however lower short-term interest rates drove a$10.4 million decline in interest income compared to the prior year. Average client equity increased 41% to$1.6 billion in the current nine months ended. Our FX Prime Brokerage business added$2.7 million in operating revenues versus the prior year as a result of a 3% 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$3.9 million versus the prior year, while Independent Wealth Management businesses added$4.4 million in operating revenues. Operating revenues in our Derivative Voice Brokerage business declined$10.5 million 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 EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 Transaction-based clearing expenses: Transaction-based clearing expenses increased 21% to$55.3 million in the third quarter compared to$45.7 million in the prior year, and were 17% of operating revenues in the third quarter compared to 16% in the prior year. The increase in expense was primarily related to increased ADR conversion fees and clearing fees withinEquity Capital Markets related to higher gross dollar volume traded, as well as higher volumes within Exchange-Traded Futures & Options, partially offset by decreased expense in LME and Financial Ag & Energy primarily related to lower volumes. Introducing broker commissions: Introducing broker commissions decreased 19% to$24.0 million in the third quarter compared to$29.6 million in the prior year, and were 7% of operating revenues in the third quarter compared to 10% in the prior year. The decrease in expense was primarily seen within Financial Ag & Energy, LME, Exchange-Traded Futures & Options and Independent Wealth Management, as a result of lower revenues. Interest expense: Interest expense decreased$27.1 million , or 64%, to$15.4 million in the third quarter compared to$42.5 million in 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 decreased$27.9 million , to$11.5 million , in 41
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the third quarter compared to$39.4 million in the prior year primarily due to the impact of changes in the short-term interest rate environment. As a result, during the third quarter, interest expense directly associated with serving as an institutional dealer in fixed income securities decreased$17.5 million to$2.6 million compared to$20.1 million in the prior year. Additionally, as a result of the impact of lower short-term interest rates, during the third quarter interest expense directly attributable to securities lending activities decreased$5.4 million to$5.1 million compared to$10.5 million in the prior year and interest expense on short-term financing facilities of subsidiaries and other direct interest expense of operating segments decreased$5.0 million to$3.8 million compared to$8.8 million . During the third quarter and the prior year, interest expense related to corporate funding purposes was$3.9 million and$3.1 million , respectively, with the increase primary due to incremental interest related to the issuance of the Senior Secured Notes, partially offset by lower current short-term interest rates. Nine Months EndedJune 30, 2020 Compared to Nine Months EndedJune 30, 2019 Transaction-based clearing expenses: Transaction-based clearing expenses increased 19% to$165.4 million in the current nine months ended compared to$138.5 million in the prior year, and were 17% of operating revenues in the current nine months ended as well as in the prior year. The increase in expense primarily resulted from higher volumes within Exchange-Traded Futures & Options and higher clearing and exchange fees withinEquity Capital Markets . Introducing broker commissions: Introducing broker commissions decreased 8% to$79.8 million in the current nine months ended compared to$87.0 million in the prior year, and were 8% of operating revenues in the current nine months ended compared to 11% in the prior year. The decrease in the percentage of introducing broker commissions as a percentage of operating revenues was primarily a result of the overall growth in operating revenues that did not have related introducing broker payouts. The decrease in expense was primarily due to decreased activity in Exchange-Traded Futures & Options and Financial Ag & Energy, partially offset by an expense increase in Independent Wealth Management as a result of higher revenues. Interest expense: Interest expense decreased$34.7 million , or 30%, to$79.2 million in the current nine months ended compared to$113.9 million in the prior year. During the current nine 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$70.4 million and$104.8 million , respectively. During the current nine months ended, interest expense directly attributable to trading activities conducted as an institutional dealer in fixed income securities was$31.0 million compared to$54.9 million in the prior year. During the current nine months ended, interest expense directly attributable to securities lending activities were$21.4 million compared to$25.0 million in the prior year. During the current nine months ended, interest expense on short-term financing facilities of subsidiaries and other direct interest expense of operating segments was$18.0 million compared to$24.9 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 nine months ended and the prior year, interest expense related to corporate funding purposes was$8.8 million and$9.1 million , respectively, due to lower current short-term interest rates, partially offset by incremental interest related to the issuance of senior secured notes duringJune 2020 . OnJune 11, 2020 , we completed the issuance and sale of$350 million in aggregate principal amount of the Company's 8.625% Senior Secured Notes due 2025 at the offering price of 98.5% of the aggregate principal amount. 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 EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 Net operating revenues increased 38% to$227.9 million in the third quarter compared to$165.6 million in the prior year. Nine Months EndedJune 30, 2020 Compared to Nine Months EndedJune 30, 2019 Net operating revenues increased 34% to$641.8 million in the current nine months ended compared to$479.8 million in the prior year. 42
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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 June 30, Nine Months Ended June 30,
(in millions) 2020 % Change 2019 2020 % Change 2019
Compensation and benefits:
Variable compensation and
benefits $ 78.5 45 % $ 54.0 $ 215.7 41 % $ 153.1
Fixed compensation and
benefits 54.0 15 % 46.9 157.5 17 % 134.8
132.5 31 % 100.9 373.2 30 % 287.9
Other expenses:
Trading systems and market
information 11.8 20 % 9.8 33.4 17 % 28.5
Occupancy and equipment
rental 5.4 8 % 5.0 15.3 6 % 14.4
Professional fees 6.1 5 % 5.8 16.8 4 % 16.1
Travel and business
development 0.7 (83 )% 4.0 8.4 (29 )% 11.8
Non-trading technology and
support 6.9 19 % 5.8 18.8 25 % 15.0
Depreciation and
amortization 4.4 26 % 3.5 12.5 30 % 9.6
Communications 1.7 6 % 1.6 4.8 (2 )% 4.9
Bad debts 1.8 260 % 0.5 6.2 313 % 1.5
Recovery of bad debt on
physical coal - n/m - - n/m (2.4 )
Other 7.6 7 % 7.1 25.7 22 % 21.0
46.4 8 % 43.1 141.9 18 % 120.4
Total compensation and
other expenses $ 178.9 24 % $ 144.0 $ 515.1 26 % $ 408.3
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Compensation and Other Expenses: Compensation and other expenses increased $34.9
million , or 24%, to $178.9 million in the third quarter compared to $144.0
million in the prior year. Compensation and other expenses related to
acquisitions closed and new business initiatives began since June 2019 added
$7.9 million in the third quarter.
Compensation and Benefits: Total compensation and benefits expense increased
$31.6 million , or 31% to $132.5 million in the third quarter compared to $100.9
million in the prior year. Total compensation and benefits were 41% of operating
revenues in the third quarter compared to 36% in the prior year. The variable
portion of compensation and benefits increased by $24.5 million , or 45%, to
$78.5 million in the third quarter compared to $54.0 million in the prior year.
Variable compensation and benefits were 34% of net operating revenues in the
third quarter compared to 33% in the prior year. The primary driver of the
increase in variable compensation was the increased front office variable
incentive compensation of $21.4 million . Additionally, administrative,
centralized and local operations and executive incentive compensation increased
$3.1 million to $10.1 million in the third quarter compared to $7.0 million in
the prior year.
The fixed portion of compensation and benefits increased $7.1 million , or 15% to
$54.0 million in the third quarter compared to $46.9 million in the prior year.
Non-variable salaries increased $5.3 million , or 16%, primarily due to our
recent acquisitions and new business initiatives, which added $2.2 million in
the third quarter. Employee benefits, excluding share-based compensation,
increased $2.4 million in the third quarter, primarily related to higher
payroll, benefits 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 third
quarter compared to $2.1 million in the prior year. The number of employees
increased 6% to 2,272 at the end of the third quarter compared to 2,151 at the
beginning of the third quarter. The number of employees at the end of the prior
year period was 1,886.
Other Expenses: Other non-compensation expenses increased $3.3 million , or 8% to
$46.4 million in the third quarter compared to $43.1 million in the prior year.
Other non-compensation expenses related to acquisitions closed and new business
initiatives began after June 2019 added $2.3 million in the third quarter.
Trading systems and market information increased $2.0 million , of which $0.9
million was related to incremental costs from recent acquisitions and new
business initiatives. Travel and business development decreased $3.3 million
primarily as a result of the impact of the response by governments and societies
to the COVID-19 pandemic, which included social distancing; travel restrictions,
"shelter in place" and other governmental regulations. Non-trading technology
and support increased $1.1 million , primarily due to higher external data center
services and non-trading software implementation costs related to various IT,
client engagement, accounting and human resources systems. Depreciation and
amortization increased $0.9 million , primarily related to an increase in IT
hardware and software, and intangibles associated with recent acquisitions.
Bad debts increased $1.3 million over the prior year. During the third quarter,
provision for bad debts were $3.5 million , primarily related to $2.4 million of
exchange-traded client trading account deficits in the Clearing & Execution
Services
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segment and$1.1 million of OTC client trading account deficits in Commercial Hedging, partially offset by recovery of a$1.7 million OTC client trading account deficit in Commercial Hedging. During the prior year, bad debt expense was$0.5 million and primarily related to OTC client trading account deficits in Commercial Hedging. Provision for Taxes: The effective income tax rate was 25% in the third quarter as well as in the prior year. For the three months endedJune 30, 2020 and 2019, the effective rate was higher than theU.S. federal statutory rate of 21% due toU.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. Nine Months EndedJune 30, 2020 Compared to Nine Months EndedJune 30, 2019 Compensation and Other Expenses: Compensation and other expenses increased$106.8 million , or 26%, to$515.1 million in the current nine months ended compared to$408.3 million in the prior year. Compensation and other expenses related to acquisitions closed and new business initiatives began afterSeptember 2018 added$31.1 million in the current nine months ended. Compensation and Benefits: Total compensation and benefits expense increased$85.3 million , or 30% to$373.2 million in the current nine months ended compared to$287.9 million in the prior year. Total compensation and benefits were 39% of operating revenues in the current nine months ended compared to 35% in the prior year. The variable portion of compensation and benefits increased$62.6 million , or 41%, to$215.7 million in the current nine months ended compared to$153.1 million in the prior year. Variable compensation and benefits were 34% of net operating revenues in the current nine months ended compared to 32% in the prior year. The primary driver of the increase in variable compensation was the increased front office variable incentive compensation of$54.8 million . Additionally, administrative, centralized and local operations and executive incentive compensation increased$7.8 million to$28.8 million in the current nine months ended compared to$21.0 million in the prior year, primarily due to increased headcount and company performance. The fixed portion of compensation and benefits increased$22.7 million , or 17% to$157.5 million in the current nine months ended compared to$134.8 million in the prior year. Non-variable salaries increased$17.6 million , or 19%, primarily due to our recent acquisitions and new business initiatives, which added$8.3 million in the current nine months ended. Employee benefits, excluding share-based compensation, increased$5.6 million in the current nine months ended, primarily related to higher payroll, health care, benefits 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$7.4 million in the current nine months ended compared to$5.9 million in the prior year. The number of employees was 2,272 at the end of the current nine months ended compared to 2,012 at the end of the prior year. Other Expenses: Other non-compensation expenses increased$21.5 million , or 18% to$141.9 million in the current nine months ended compared to$120.4 million in the prior year. Other non-compensation expenses related to acquisitions closed and new business initiatives began afterSeptember 2018 added$7.4 million in the current nine months ended. Trading systems and market information costs increased$4.9 million , of which$3.7 million was related to incremental costs from recent acquisitions and new business initiatives. Travel and business development decreased$3.4 million primarily as a result of the impact of the response by governments and societies to the COVID-19 pandemic, which included social distancing; travel restrictions, "shelter in place" and other governmental regulations. Non-trading technology and support increased$3.8 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 nine 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 nine months ended. The increase in other expense primarily related to our jointly held internal bi-annual global sales meeting and customerGlobal Markets Outlook Conference held duringFebruary 2020 . Excluding the recovery of bad debt on physical coal discussed below, bad debts increased$4.7 million year-over-year. During the current nine months ended, bad debts were$6.2 million , primarily related to$3.3 million of OTC client trading account deficits in the Commercial Hedging segment,$2.7 million of exchange-traded client trading account deficits in the Clearing & Execution Services segment and$0.2 million in uncollected receivables in thePhysical Commodities segment. During the prior year, bad debts were$1.5 million , primarily related to agricultural and metals OTC client trading account deficits in Commercial Hedging. 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 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 . 44
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Other Gain: The prior year includes a bargain purchase gain of$5.4 million related to the acquisition of the former subsidiaryGMP Securities LLC , which was subsequently merged intoStoneX Financial Inc. Provision for Taxes: The effective income tax rate was 27% in the current nine months ended compared to 25% in the prior year. For the nine months endedJune 30, 2020 and 2019, the effective rate was higher than theU.S. federal statutory rate of 21% due toU.S. state and local taxes, GILTI,U.S. and foreign permanent differences, and the amount of foreign earnings taxed at higher tax rates. The estimated GILTI tax expense increased the effective rate approximately 1.0% and 1.3% for the nine months endedJune 30, 2020 and 2019, respectively. The amount of foreign earnings taxed at higher tax rates increased the effective tax rate approximately 2.0% and 1.4% for the nine months endedJune 30, 2020 and 2019, respectively. The estimatedU.S. state and local taxes increased the effective tax rate approximately 1.7% and 1.2% for the nine months endedJune 30, 2020 and 2019, respectively. Unallocated Costs and Expenses The following table is a breakout of our unallocated costs and expenses from the total costs and expenses shown above. The unallocated costs and expenses include certain shared services such as information technology, accounting and treasury, credit and risk, legal and compliance, and human resources and other activities. Three Months Ended June 30, Nine Months Ended June 30, (in millions) 2020 % Change 2019 2020 % Change 2019 Compensation and benefits: Variable compensation and benefits$ 8.9 46 %$ 6.1 $ 25.2 39 %$ 18.1 Fixed compensation and benefits 20.6 11 % 18.6 62.3 15 % 54.2 29.5 19 % 24.7 87.5 21 % 72.3 Other expenses: Trading systems and market information 0.9 200 % 0.3 2.1 110 % 1.0 Occupancy and equipment rental 5.3 6 % 5.0 15.2 6 % 14.3 Professional fees 5.3 61 % 3.3 13.2 31 % 10.1 Travel and business development 0.2 (71 )% 0.7 2.2 (21 )% 2.8 Non-trading technology and support 5.3 20 % 4.4 14.7 30 % 11.3 Depreciation and amortization 4.1 46 % 2.8 11.8 53 % 7.7 Communications 1.5 7 % 1.4 4.2 (9 )% 4.6 Other 5.1 24 % 4.1 15.5 27 % 12.2 27.7 26 % 22.0 78.9 23 % 64.0 Total compensation and other expenses$ 57.2 22 %$ 46.7 $
166.4 22 %
Total unallocated costs and other expenses increased$10.5 million to$57.2 million in the third quarter compared to$46.7 million in the prior year. Compensation and benefits increased$4.8 million , or 19%, to$29.5 million in the third quarter compared to$24.7 million in the prior year. The increase in fixed compensation and benefits was primarily related to a 27% increase in headcount across several administrative departments, including IT, compliance and accounting. The increase in variable compensation and benefits was primarily due to improved overall company performance. Other non-compensation expenses increased$5.7 million , or 26%, to$27.7 million in the third quarter compared to$22.0 million in the prior year primarily related to higher professional fees incurred in conjunction with the increased merger and acquisitions activity and increased amortization of intangibles acquired, as well as$1.4 million of incremental costs related to acquisitions closed and new business initiatives began afterJune 2019 . Nine Months EndedJune 30, 2020 Compared to Nine Months EndedJune 30, 2019 Total unallocated costs and other expenses increased$30.1 million to$166.4 million in the current nine months ended compared to$136.3 million in the prior year. Compensation and benefits increased$15.2 million , or 21% to$87.5 million in the current nine months ended compared to$72.3 million in the prior year. During the current nine months ended, the increase in fixed compensation and benefits was primarily related to a 27% increase in headcount across several administrative departments, including IT, compliance and accounting. The increase in variable compensation and benefits was primarily due to improved overall company performance. Other non-compensation expenses increased$14.9 million , or 23%, to$78.9 million in the current nine months ended compared to$64.0 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. The increase in other expense primarily related to our jointly held internal bi-annual global sales meeting and customerGlobal Markets Outlook Conference held duringFebruary 2020 . 45
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Variable vs. Fixed Expenses
Three Months Ended June 30, Nine Months Ended June 30,
% of % of % of % of
(in millions) 2020 Total 2019 Total 2020 Total 2019 Total
Variable
compensation and
benefits $ 78.5 30 % $ 54.0 25 % $ 215.7 29 % $ 153.1 24 %
Transaction-based
clearing expenses 55.3 22 % 45.7 21 % 165.4 22 % 138.5 22 %
Introducing broker
commissions 24.0 9 % 29.6 13 % 79.8 10 % 87.0 14 %
Total variable
expenses 157.8 61 % 129.3 59 % 460.9 61 % 378.6 60 %
Fixed compensation
and benefits 54.0 21 % 46.9 21 % 157.5 20 % 134.8 21 %
Other fixed
expenses 44.6 17 % 42.6 20 % 135.7 18 % 121.3 19 %
Bad debts 1.8 1 % 0.5 - % 6.2 1 % 1.5 - %
Recovery of bad
debt on physical
coal - - % - - % - - % (2.4 ) - %
Total non-variable
expenses 100.4 39 % 90.0 41 % 299.4 39 % 255.2 40 %
Total non-interest
expenses $ 258.2 100 % $ 219.3 100 % $
760.3 100 %
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 nine months endedJune 30, 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 61% in the third quarter compared to 59% in the prior year. As a percentage of total non-interest expenses, variable expenses were 61% in the current nine months ended compared to 60% in the prior year. During the third quarter, non-variable expenses, excluding bad debts, increased$9.1 million , or 10%, period-over-period, of which$5.1 million of the increase related to acquisitions closed and new business initiatives began afterJune 2019 . During the current nine months ended, non-variable expenses, excluding bad debts and the recovery of bad debt on physical coal, increased$37.1 million , or 14%, period-over-period, of which$18.3 million of the increase related to acquisitions closed and new business initiatives began afterSeptember 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 nine months ended. Segment Information Our business activities are managed as operating segments and organized into reportable segments as follows:StoneX Group 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 June 30, Nine Months Ended June 30,
% of % of % of % of
Operating Operating Operating Operating
(in millions) 2020 Revenues 2019 Revenues 2020 Revenues 2019 Revenues
Revenues:
Sales of physical
commodities $ 7,944.5 $ 7,599.3 $ 38,939.4 $ 20,824.6
Principal gains, net 161.9 100.9 441.5 305.4
Commission and clearing
fees 96.6 97.2 301.1 282.4
Consulting, management,
and account fees 17.3 20.1 60.2 57.1
Interest income 24.1 55.2 117.6 153.8
Total revenues 8,244.4 7,872.7 39,859.8 21,623.3
Cost of sales of physical
commodities 7,920.8 7,589.6 38,888.5 20,798.2
Operating revenues 323.6 100% 283.1 100% 971.3 100% 825.1 100%
Transaction-based
clearing expenses 54.9 17% 45.4 16% 164.4 17% 137.8 17%
Introducing broker
commissions 24.0 7% 29.5 10% 79.8 8% 86.9 11%
Interest expense 12.3 4% 41.3 15% 74.6 8% 110.1 13%
Net operating revenues 232.4 166.9 652.5 490.3
Variable direct
compensation and benefits 68.8 21% 47.3 17% 188.2 19% 133.1 16%
Net contribution 163.6 119.6 464.3 357.2
Fixed compensation and
benefits 29.0 24.5 82.4 69.3
Other fixed expenses 22.1 25.0 71.9 70.5
Bad debts 1.8 0.5 6.2 1.5
Recovery of bad debt on
physical coal - - - (2.4 )
Total non-variable direct
expenses 52.9 16% 50.0 18% 160.5 17% 138.9 17%
Segment income $ 110.7 $ 69.6 $ 303.8 $ 218.3
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Net contribution for all of our business segments increased 37% to $163.6
million in the third quarter compared to $119.6 million in the prior year.
Segment income increased to $110.7 million in the third quarter compared to
$69.6 million in the prior year.
Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019
Net contribution for all of our business segments increased 30% to $464.3
million in the current nine months ended compared to $357.2 million in the prior
year. Segment income increased 39% to $303.8 million in the current nine months
ended compared to $218.3 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 risks. 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 London Metals Exchange ("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 June 30, Nine Months Ended June 30,
(in millions) 2020 % Change 2019 2020 % Change 2019
Revenues:
Sales of physical commodities $ - - $ - $ - - $ -
Principal gains, net 29.2 (26)% 39.3 120.0 18% 101.4
Commission and clearing fees 30.1 (17)% 36.2
91.4 -% 91.7
Consulting, management, and
account fees 4.0 3% 3.9 12.5 7% 11.7
Interest income 1.8 (74)% 7.0 12.6 (43)% 22.0
Total revenues 65.1 (25)% 86.4 236.5 4% 226.8
Cost of sales of physical
commodities - - - - - -
Operating revenues 65.1 (25)% 86.4 236.5 4% 226.8
Transaction-based clearing
expenses 9.4 (10)% 10.5 29.1 3% 28.3
Introducing broker commissions 4.8 (44)% 8.5
17.1 (11)% 19.2
Interest expense 0.1 (80)% 0.5 0.9 (31)% 1.3
Net operating revenues 50.8 (24)% 66.9 189.4 6% 178.0
Variable compensation and
benefits 14.8 (22)% 18.9 55.5 11% 50.1
Net contribution 36.0 (25)% 48.0 133.9 5% 127.9
Fixed compensation and benefits 8.9 7% 8.3 26.3 5% 25.0
Other fixed expenses 8.5 (11)% 9.6 27.8 (2)% 28.5
Bad debts (0.6 ) (250)% 0.4 3.3 175% 1.2
Total non-variable direct
expenses 16.8 (8)% 18.3 57.4 5% 54.7
Segment income $ 19.2 (35)% $ 29.7 $ 76.5 5% $ 73.2 The following tables set forth transactional revenues and selected data for Commercial Hedging for the periods indicated.
Exchange-traded
Three Months Ended June 30 ,
Nine Months Ended
2020 % Change 2019 2020 % Change 2019
Transactional revenues (in millions):
Agricultural $ 21.7 (17)% $ 26.3 $ 65.0 3% $ 63.4
Energy and renewable fuels 2.7 13% 2.4 7.2 13% 6.4
LME metals 11.2 (7)% 12.0 42.8 8% 39.5
Other 1.8 (36)% 2.8 6.3 (28)% 8.7
$ 37.4 (14)% $ 43.5 $ 121.3 3% $ 118.0
Selected data:
Futures and options (contracts,
000's) 6,673.6 (20)% 8,323.5 22,492.4 5% 21,414.1
Average rate per contract $ 5.51 7% $ 5.15 $ 5.31 (2)% $ 5.41
Average client equity - futures
and options (millions) $ 1,118.3 24% $ 901.3 $ 988.6 5% $ 941.0
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OTC
Three Months Ended June 30, Nine Months Ended June 30,
2020 % Change 2019 2020 % Change 2019
Transactional revenues (in millions):
Agricultural $ 15.3 (42)% $ 26.3 $ 53.5 (10)% $ 59.2
Energy and renewable fuels 4.3 -% 4.3 30.1 121% 13.6
Other 2.3 64% 1.4 6.5 183% 2.3
$ 21.9 (32)% $ 32.0 $ 90.1 20% $ 75.1
Selected data:
Volume (contracts, 000's) 539.5 4% 518.0
1,638.0 25% 1,310.8
Average rate per contract
Three Months EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 Operating revenues decreased 25% to$65.1 million in the third quarter compared to$86.4 million in the prior year. Exchange-traded revenues decreased 14%, to$37.4 million in the third quarter as exchange-traded contract volumes decreased 20% versus the prior year. These declines were primarily in agricultural commodities, as the prior year quarter benefited from strong performance in domestic grain markets due to weather-related volatility. The average rate per contract increased 7% compared to the prior year to$5.51 . OTC revenues decreased 32% to$21.9 million in the third quarter compared to$32.0 million in the prior year, with a 4% increase in OTC volumes, more than offset by a 35% decline in the average rate per contract in the third quarter compared to the prior year. This was primarily driven by a 42% decline in agricultural OTC revenues versus the prior year, as the prior year quarter benefited from strong performance in domestic and South American grain markets due to weather-related volatility. Consulting, management, and account fees increased modestly compared to the prior year to$4.0 million in the third quarter. Interest income decreased 74%, to$1.8 million compared to$7.0 million in the prior year, driven primarily by declines in short-term interest rates. The impact of interest rate cuts was partially offset by a 24% increase in average equity for exchange-traded futures and options clients versus the prior year to$1.1 billion in the third quarter. Segment income decreased 35% to$19.2 million in the third quarter compared to$29.7 million in the prior year, primarily as a result of the$21.3 million decline in operating revenues. This decline in operating revenues was partially offset by a$0.5 million decline in non-variable direct expenses and a$1.0 million favorable change in bad debts due to net recoveries of$0.6 million in the third quarter. Variable expenses, excluding interest, expressed as a percentage of operating revenues increased to 45% compared to 44% in the prior year, primarily as the result of the decline in interest income. Nine Months EndedJune 30, 2020 Compared to Nine Months EndedJune 30, 2019 Operating revenues increased 4% to$236.5 million in the current nine months ended compared to$226.8 million in the prior year. Exchange-traded revenues increased 3% to$121.3 million in the current nine 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 5%, while the average rate per contract decreased 2% to$5.31 . OTC revenues increased 20%, to$90.1 million in the current nine months ended driven by a 25% increase in OTC volumes, which was partially offset by a 4% decline 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. Agricultural OTC revenues declined 10% as the prior year period included strong performance driven by weather related volatility. 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 the calendar year. Consulting, management and account fees increased 7% to$12.5 million in the current nine months ended compared to$11.7 million in the prior year while interest income declined 43%, to$12.6 million , in the current nine months ended compared to$22.0 million in the prior year. The decline in interest income was driven by lower short-term interest rates as a result ofFOMC actions to reduce short-term interest rates in the first and second quarters of fiscal 2020 which was partially offset by a 5% increase in average client equity to$988.6 million . Segment income increased 5% to$76.5 million in the current nine months ended compared to$73.2 million in the prior year, driven by the growth in operating revenues which was partially offset by a$2.7 million increase in non-variable direct expenses. Variable expenses, excluding interest, expressed as a percentage of operating revenues were 43% in both the current nine months ended as well as in the prior year. 49
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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 and
derive principal gains, net 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 June 30, Nine Months Ended June 30,
(in millions) 2020 % Change 2019 2020 % Change 2019
Revenues:
Sales of physical commodities $ - - $ - $ - - $ -
Principal gains, net 25.9 (6)% 27.5 83.4 2% 81.7
Commission and clearing fees 0.9 (10)% 1.0 2.9 4% 2.8
Consulting, management, account
fees 0.6 50% 0.4 1.9 36% 1.4
Interest income - - - - (100)% 0.1
Total revenues 27.4 (5)% 28.9 88.2 3% 86.0
Cost of sales of physical
commodities - - - - - -
Operating revenues 27.4 (5)% 28.9 88.2 3% 86.0
Transaction-based clearing
expenses 1.2 -% 1.2 3.9 11% 3.5Introducing broker commissions 0.1 (50)% 0.2
0.4 (33)% 0.6
Interest expense 0.1 n/m - 0.1 (50)% 0.2
Net operating revenues 26.0 (5)% 27.5 83.8 3% 81.7
Variable compensation and
benefits 5.1 (2)% 5.2 16.5 8% 15.3
Net contribution 20.9 (6)% 22.3 67.3 1% 66.4
Fixed compensation and benefits 3.1 19% 2.6 8.7 23% 7.1
Other fixed expenses 1.9 (30)% 2.7 6.6 (16)% 7.9
Bad debts - - - - - -
Total non-variable direct
expenses 5.0 (6)% 5.3 15.3 2% 15.0
Segment income $ 15.9 (6)% $ 17.0 $ 52.0 1% $ 51.4
Selected data:
Global Payments (# of payments,
000's) 194.8 11% 174.9 592.9 18% 504.3
Average revenue per payment $ 137.58 (16)% $ 162.95 $ 145.56 (13)% $ 167.56
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Three Months EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 Operating revenues decreased 5% to$27.4 million in the third quarter compared to$28.9 million in the prior year as an 11% growth in volume of payments made was more than offset by a 16% decline in the average revenue per payment compared to the prior year. The increase in the volume of payments made is a result of the continued expansion of payment flow into additional markets by recently on-boarded commercial banking clients. The number of larger debt capital market transactions from our international banking clients decreased in the third quarter compared to the prior year due to the global economic slowdown impact of the COVID-19 pandemic, resulting in the decline in the average revenue per payment in the current period. Segment income decreased 6% to$15.9 million in the third quarter compared to$17.0 million in the prior year. This decrease was primarily a result of the decline in operating revenues, which was partially offset by lower non-variable direct expenses including trade system costs and travel and business development. Variable expenses, excluding interest, expressed as a percentage of operating revenues were 23% in the third quarter as well as in the prior year. Nine Months EndedJune 30, 2020 Compared to Nine Months EndedJune 30, 2019 Operating revenues increased 3% to$88.2 million in the current nine months ended compared to$86.0 million in the prior year, driven by 18% growth in the volume of payments made which was partially offset by a 13% decline in the average revenue per payment compared to the prior year. The volume of payments increased over the prior year period as a result of the continued expansion of payment flow into additional markets by recently on-boarded commercial banking clients.The number of larger debt capital market transactions from our international banking clients decreased in the third quarter compared to the prior year due to the global economic slowdown impact of the COVID-19 pandemic, resulting in the decline in the average revenue per payment in the current year. Segment income increased 1% to$52.0 million in the current nine months ended compared to$51.4 million in the prior year. This increase primarily resulted from higher operating revenues, partially offset by a$0.3 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 nine months ended compared to 23% in the prior year. 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 includeU.S. -based regional and national broker-dealers and institutions investing or executing client transactions in international markets and foreign institutions seeking access to theU.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 inArgentina andBrazil where we are active in providing institutional executions in the local capital markets. We act as an institutional dealer in fixed income securities, includingU.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 inArgentina ) 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. 51
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The following table provides the financial performance for Securities for the
periods indicated.
Three Months Ended June 30, Nine Months Ended June 30,
(in millions) 2020 % Change 2019 2020 % Change 2019
Revenues:
Sales of physical commodities $ - - $ - $ - - $ -
Principal gains, net 88.4 203% 29.2 197.8 108% 95.2
Commission and clearing fees 13.6 97% 6.9 38.3
81% 21.2
Consulting, management, and
account fees 1.8 (14)% 2.1 5.6 2% 5.5
Interest income 19.2 (47)% 36.0 80.3 (14)% 93.9
Total revenues 123.0 66% 74.2 322.0 49% 215.8
Cost of sales of physical
commodities - - - - - -
Operating revenues 123.0 66% 74.2 322.0 49% 215.8
Transaction-based clearing
expenses 16.5 57% 10.5 44.3 28% 34.7
Introducing broker commissions 0.4 (50)% 0.8
1.3 (13)% 1.5 Interest expense 9.0 (72)% 32.6 58.1 (32)% 85.2 Net operating revenues 97.1 220% 30.3 218.3 131% 94.4 Variable compensation and benefits 32.8 165% 12.4 76.1 120% 34.6 Net contribution 64.3 259% 17.9 142.2 138% 59.8 Fixed compensation and benefits 8.7 58% 5.5 23.0 65% 13.9 Other fixed expenses 4.0 (5)% 4.2 12.5 26% 9.9 Bad debts - - - - -% - Total non-variable direct expenses 12.7 31% 9.7 35.5 49% 23.8 Segment income$ 51.6 529%$ 8.2 $ 106.7 196%$ 36.0
The following table sets forth operating revenues by product line and selected data for Securities for the periods indicated.
Three Months Ended June 30 ,
Nine Months Ended
2020 % Change 2019 2020 % Change 2019
Operating revenues by product line (in millions):
Equity Capital Markets $ 68.2 118% $ 31.3 $ 171.7 62% $ 105.7
Debt Capital Markets 53.9 32% 40.9 145.8 40% 104.3
Asset Management 0.9 (55)% 2.0 4.5 (22)% 5.8
$ 123.0 66% $ 74.2 $ 322.0 49% $ 215.8
Selected data:
Equity Capital Markets (gross
dollar volume, millions) $ 64,606.3 83% $ 35,355.5 $ 191,490.5 65% $ 115,903.0
Equity Capital Markets revenue
per $1,000 traded $ 0.96 68% $ 0.57 $ 0.76 12% $ 0.68
Debt Capital Markets (principal
dollar volume, millions) $ 46,596.0 8% $ 43,094.6 $ 138,411.7 (15)% $ 162,001.9
Debt Capital Markets revenue per
$1,000 traded $ 1.16 22% $ 0.95 $ 1.05 64% $ 0.64
Average assets under management
in Argentina (millions) $ 326.6 (7)% $ 351.5 $
313.2 (4)%
Three Months EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 Operating revenues increased 66% to a record$123.0 million in the third quarter compared to$74.2 million in the prior year. Operating revenues inEquity Capital Markets increased 118% in the third quarter compared to the prior year period as the gross dollar volume traded increased 83% and the average revenue per$1,000 traded increased 68% 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 due to 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 condensed consolidated income statements as 'transaction-based clearing expenses'. Operating revenues inDebt Capital Markets increased 32% in the third quarter compared to the prior year, as principal dollar volumes increased 8% and the revenue per$1,000 traded increased 22% compared to the prior year. The increase in the revenue per$1,000 traded was the result of a widening of spreads due to increased volatility as a result of the global pandemic. Operating revenues in Asset Management decreased 55% in the third quarter compared to the prior year due primarily to difficult market conditions inArgentina , including volatility in the Argentine peso. Average assets under management inArgentina declined 7% in the third quarter to$326.6 million compared to$351.5 million in the prior year. 52
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Segment income increased 529% to$51.6 million in the third quarter compared to$8.2 million in the prior year. Segment income in ourEquity Capital Markets business increased$24.7 million to$24.9 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 ourDebt Capital Markets business increased$19.4 million to$26.3 million , primarily driven by the increase in operating revenues noted above. Variable expenses, excluding interest, expressed as a percentage of operating revenues were 40% in the third quarter compared to 32% in the prior year. This increase in variable expenses was primarily driven by an increase in variable compensation resulting from a change in compensation structure withinEquity Capital Markets for fiscal 2020 to a higher-variable and less-fixed compensation model, along with the significant increase in operating revenues. Nine Months EndedJune 30, 2020 Compared to Nine Months EndedJune 30, 2019 Operating revenues increased 49% to$322.0 million in the current nine months ended compared to$215.8 million in the prior year. Operating revenues inEquity Capital Markets increased 62% in the current nine months ended compared to the prior year. This increase was driven by a 65% increase in the gross dollar volume traded, most notably in the second quarter of fiscal 2020 as well as a well as a widening of spreads in the third quarter, each of which were driven by heightened volatility in the global equity markets due to 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 inDebt Capital Markets increased 40% in the current nine months ended compared to the prior year, despite a 15% decline in the principal dollar volume traded, as the revenue per$1,000 traded increased 64% in the current nine months ended compared to the prior year. Asset Management operating revenues decreased 22% in the current nine months ended compared to the prior year as average assets under management inArgentina decreased 4% to$313.2 million in the current nine months ended compared to$327.2 million in the prior year. Segment income increased 196% to$106.7 million in the current nine months ended compared to$36.0 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 nine months ended, as well as an$11.7 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 38% in the current nine 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 Commodities The Physical Commodities segment consists of ourPrecious Metals trading and Physical Ag & Energy commodity businesses. InPrecious 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 underU.S. GAAP in accounting for this price risk mitigation. Management continues to evaluate performance and allocate resources on an operating revenue basis. 53
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The following table provides the financial performance forPhysical Commodities for the periods indicated. Three Months Ended June 30, Nine Months Ended June 30, (in millions) 2020 % Change 2019 2020 % Change 2019 Revenues: Sales of physical commodities$ 7,944.5 5%$ 7,599.3 $ 38,939.4 87%$ 20,824.6 Principal gains, net 13.5 1,025% 1.2 22.7 92% 11.8 Commission and clearing fees - n/m - - n/m 0.1 Consulting, management, and account fees 0.6 (33)% 0.9 1.8 (10)% 2.0 Interest income 1.4 (52)% 2.9 7.9 (7)% 8.5 Total revenues 7,960.0 5% 7,604.3 38,971.8 87% 20,847.0 Cost of sales of physical commodities 7,920.8 4% 7,589.6 38,888.5 87% 20,798.2 Operating revenues 39.2 167% 14.7 83.3 71% 48.8 Transaction-based clearing expenses 0.6 50% 0.4 1.6 78% 0.9 Introducing broker commissions 0.3 200% 0.1 0.8 300% 0.2 Interest expense 2.6 (42)% 4.5 9.8 (22)% 12.5 Net operating revenues 35.7 268% 9.7 71.1 102% 35.2 Variable compensation and benefits 11.5 248% 3.3 21.8 114% 10.2 Net contribution 24.2 278% 6.4 49.3 97% 25.0 Fixed compensation and benefits 2.5 9% 2.3 7.1 4% 6.8 Other fixed expenses 1.4 17% 1.2 4.5 15% 3.9 Bad debts - (100)% 0.1 0.2 -% 0.2 Recovery of bad debt on physical coal - n/m - - n/m (2.4 ) Total non-variable direct expenses 3.9 8% 3.6 11.8 39% 8.5 Segment income$ 20.3 625%$ 2.8 $ 37.5 127%$ 16.5
The following tables set forth operating revenue by product line and selected
data for
Precious Metals
Three Months Ended June 30, Nine Months Ended June 30,
($ in millions, except revenue
per ounce traded) 2020 % Change 2019 2020 % Change 2019
Total revenues $ 7,623.0 4% $ 7,331.7 $ 37,984.3 90% $ 19,963.5
Cost of sales of physical
commodities 7,591.4 4% 7,324.2 37,925.6 90% 19,936.4
Operating revenues $ 31.6 321% $ 7.5 $ 58.7 117% $ 27.1
Selected data:
Gold equivalent ounces traded
(000's) 101,596.1 13% 90,283.7 330,429.8 26% 263,224.4
Average revenue per ounce traded $ 0.31 288% $ 0.08 $ 0.18 80% $ 0.10
Physical Ag & Energy
Three Months Ended June 30, Nine Months Ended June 30,
(in millions) 2020 % Change 2019 2020 % Change 2019
Total revenues $ 337.0 24% $ 272.6 $ 987.5 12% $ 883.5
Cost of sales of physical commodities 329.4 24% 265.4 962.9 12% 861.8
Operating revenues $ 7.6 6% $ 7.2 $ 24.6 13% $ 21.7
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Operating revenues for Physical Commodities increased 167% to $39.2 million in
the third quarter compared to $14.7 million in the prior year.
Precious Metals operating revenues increased 321% to $31.6 million in the third
quarter compared to $7.5 million in the prior year, as global precious metal
market dislocations related to the COVID-19 pandemic resulted into a widening of
spreads and an increase in physical premiums which drove a 288% increase in the
average revenue per ounce traded. Increased customer demand for precious metals
drove a 13% increase in the number of gold equivalent ounces traded compared to
the prior year. The prior year period includes a $2.5 million unrealized loss on
derivative positions held against precious metals inventory carried at the lower
of cost or net realizable value in our non-broker dealer subsidiaries.
Operating revenues in Physical Ag & Energy increased 6% to $7.6 million in the
third quarter compared to the prior year. The increase in operating revenues was
largely due to increased activity with customers in biodiesel feedstock markets
which was partially offset by lower activity in our commodity financing
programs. These increases in operating revenues were partially
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tempered by a$2.4 million unrealized loss on derivative positions held against energy inventories carried at the lower of cost or net realizable value. Segment income increased 625% to$20.3 million in the third quarter compared to$2.8 million in the prior year, primarily as a result of the increases in operating revenues noted above, partially offset by a related increase in variable compensation. Nine Months EndedJune 30, 2020 Compared to Nine Months EndedJune 30, 2019 Operating revenues forPhysical Commodities increased 71% to$83.3 million in the current nine months ended compared to$48.8 million in the prior year.Precious Metals operating revenues increased 117% to$58.7 million in the current nine months ended compared to$27.1 million in the prior year. The number of gold equivalent ounces traded increased 26% compared to the prior year period, while the average revenue per ounce traded increased 80% in the current nine months ended compared to the prior year. The growth in operating revenues was driven by the acquisition ofCoinInvest GmbH andEuropean Precious Metal Trading GmbH in the third quarter of fiscal 2019 as well as a significant increase in customer demand and a widening of spreads due to market dislocations related to the COVID-19 global pandemic and the resulting effect on the global precious metals market. Operating revenues in Physical Ag & Energy increased 13% to$24.6 million in the current nine months ended compared to$21.7 million in the prior year. The increase in operating revenues was largely due to increased activity with customers in biodiesel feedstock markets. These increases in operating revenues were partially tempered by a$2.4 million unrealized loss on derivative positions held against energy inventories carried at the lower of cost or net realizable value. Segment income increased 127% to$37.5 million in the current nine months ended compared to$16.5 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 ofJune 30, 2020 , ourU.S. FCM held$2.7 billion in required client segregated assets, which we believe makes us the third largest independent, non-bank FCM in theU.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 ofJune 30, 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 ourLondon -basedEurope ,Middle East andAfrica ("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. 55
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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 June 30, Nine Months Ended June 30,
(in millions) 2020 % Change 2019 2020 % Change 2019
Sales of physical commodities $ - - $ - $ - - $ -
Principal gains, net 4.9 32% 3.7 17.6 15% 15.3
Commission and clearing fees 52.0 (2)% 53.1 168.5
1% 166.6
Consulting, management, and
account fees 10.3 (20)% 12.8 38.4 5% 36.5
Interest income 1.7 (82)% 9.3 16.8 (43)% 29.3
Total revenues 68.9 (13)% 78.9 241.3 (3)% 247.7
Cost of physical commodities
sold - - - - - -
Operating revenues 68.9 (13)% 78.9 241.3 (3)% 247.7
Transaction-based clearing
expenses 27.2 19% 22.8 85.5 21% 70.4
Introducing broker commissions 18.4 (8)% 19.9 60.2 (8)% 65.4
Interest expense 0.5 (86)% 3.7 5.7 (48)% 10.9
Net operating revenues 22.8 (30)% 32.5 89.9 (11)% 101.0
Variable compensation and
benefits 4.6 (39)% 7.5 18.3 (20)% 22.9
Net contribution 18.2 (27)% 25.0 71.6 (8)% 78.1
Fixed compensation and benefits 5.8 -% 5.8 17.3 5% 16.5
Other fixed expenses 6.3 (14)% 7.3 20.5 1% 20.3
Bad debts 2.4 n/m - 2.7 2,600% 0.1
Total non-variable direct
expenses 14.5 11% 13.1 40.5 10% 36.9
Segment income $ 3.7 (69)% $ 11.9 $ 31.1 (25)% $ 41.2 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 June 30 ,
Nine Months Ended
2020 % Change 2019 2020 % Change 2019
Operating revenues by product line (in millions):
Exchange-Traded Futures &
Options $ 36.7 (5)% $ 38.6 $ 125.2 1% $ 124.3
FX Prime Brokerage 4.9 20% 4.1 19.1 16% 16.4
Correspondent Clearing 5.2 (41)% 8.8 21.6 (15)% 25.5
Independent Wealth Management 19.1 (5)% 20.0 62.5 8% 58.1
Derivative Voice Brokerage 3.0 (59)% 7.4 12.9 (45)% 23.4
Operating revenues $ 68.9 (13)% $ 78.9 $ 241.3 (3)% $ 247.7
Selected data:
Exchange-traded - futures and
options (contracts, 000's) 30,953.8 32% 23,442.0 96,806.9 26% 76,938.8
Exchange-traded - futures and
options average rate per
contract $ 1.11 (13)% $ 1.27 $ 1.12 (11)% $ 1.26
Average client equity - futures
and options (millions) $ 1,908.2 86% $ 1,026.0 $ 1,587.6 41% $ 1,124.4
FX Prime Brokerage volume (U.S.
notional, millions) $ 58,300.5 (30)% $ 83,469.9 $ 262,650.8 3% $ 253,850.2
Average money market / FDIC
sweep client balances (millions) $ 1,260.5 64% $ 769.3 $
1,066.3 38%
Three Months EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 Operating revenues decreased 13% to$68.9 million in the third quarter compared to$78.9 million in the prior year. Operating revenues in our Exchange-Traded Futures & Options business decreased 5% to$36.7 million in the third quarter compared to$38.6 million in the prior year. Exchange-Traded commission and clearing fee revenue increased$3.9 million compared to the prior year as a result of a 32% increase in exchange-traded volumes which was partially offset by a 13% decline in the average rate per contract to$1.11 . However, these increases were more than offset by a$6.2 million decrease in interest income in the Exchange-Traded Futures & Options business to$0.4 million in the third quarter due to lower short-term interest rates, which was partially offset by an 86% increase in average client equity compared to the prior year to$1.9 billion . 56
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Operating revenues in our FX Prime Brokerage increased 20% compared to the prior year to$4.9 million in the third quarter, despite a 30% decline in foreign exchange volumes. Correspondent Clearing operating revenues decreased 41% compared to the prior year to$5.2 million in the third quarter, while operating revenues in Independent Wealth Management decreased 5% to$19.1 million compared to the prior year. In the Correspondent Clearing business, interest income decreased$1.2 million to$1.1 million in the third quarter and fee income related to money market/FDIC sweep balances declined$3.0 million to$0.8 million , despite a 64% increase in the average money market/FDIC sweep balances as the result of a decline in short-term interest rates. Operating revenues in Derivative Voice Brokerage declined 59% to$3.0 million in the third quarter compared to the prior year. Segment income decreased 69% to$3.7 million in the third quarter compared to$11.9 million in the prior year, primarily a result of the decline in operating revenues as well as a$2.4 million increase in bad debt expense related to exchange-traded client trading account deficits. Variable expenses, excluding interest, as a percentage of operating revenues increased to 73% in the third quarter compared to 64% in the prior year, primarily related to an increase in transaction-based clearing expenses related to product mix and the decline in interest income. Nine Months EndedJune 30, 2020 Compared to Nine Months EndedJune 30, 2019 Operating revenues were$241.3 million in the current nine months ended compared to$247.7 million in the prior year. Operating revenues in our Exchange-Traded Futures & Options business increased 1% to$125.2 million in the current nine months ended compared to$124.3 million in the prior year. Exchange-traded volumes increased 26% compared to the prior year period, however the average rate per contract declined 11%. Interest income in the Exchange-Traded Futures & Options business decreased$10.4 million to$10.9 million in the current nine months ended as a result of a decline in short-term rates which was partially offset by a 41% increase in average client equity to$1.6 billion . Operating revenues in our FX Prime Brokerage increased 16% to$19.1 million in the current nine months ended compared to$16.4 million in the prior year as a result of a 3% 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 15% to$21.6 million in the current nine months ended, while Independent Wealth Management operating revenues increased 8% versus the prior year to$62.5 million . In the Correspondent Clearing business, interest income decreased$2.3 million to$4.8 million the third quarter and fee income related to money market/FDIC sweep balances declined$3.2 million to$7.5 million , both of which were primarily driven by a decline in short-term interest rates. Operating revenues in the Derivative Voice Brokerage business decreased 45% versus the prior year to$12.9 million in the current nine months ended. Segment income decreased 25% to$31.1 million in the current nine months ended compared to$41.2 million in the prior year. This was driven by the decline in operating revenue, an increase in transaction-based clearing fees as a percentage of operating revenues as well as a$2.6 million increase in bad debt expense. Variable expenses, excluding interest, as a percentage of operating revenues were 68% in the current nine 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.StoneX Financial Inc. is registered as a broker-dealer with theSecurities and Exchange Commission ("SEC") and is a member of theFinancial Industry Regulatory Authority ("FINRA") and theMunicipal Securities Rulemaking Board ("MSRB"). In addition,StoneX Financial Inc. is registered as a futures commission merchant with the CFTC and NFA, and a member of various commodities and futures exchanges in theU.S. and abroad.StoneX Financial Inc. 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 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.StoneX Financial Inc. 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 57
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to support our clients' open trading positions, including the amount of assets thatStoneX Financial Inc. must maintain in relatively liquid form, and are designed to measure general financial integrity and liquidity.StoneX Financial Inc. is also subject to the Rule 15c3-3 of the Securities Exchange Act of 1934, as amended ("Customer Protection Rule").StoneX Financial Ltd (formerlyINTL FCStone Ltd ) is regulated by theFinancial Conduct Authority ("FCA"), the regulator of the financial services industry in theU.K. and is subject to regulations which impose regulatory capital requirements.StoneX Financial Ltd is a member of various commodities and futures exchanges in theU.K. andEurope and has the responsibility to meet margin calls at all exchanges on a daily basis and intra-day basis, if necessary.StoneX Financial Ltd is required to be compliant with theU.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.StoneX Pte Ltd holds a Capital Market Services License under the Securities and Futures Act inSingapore to carry on the business of dealing in capital markets products. The principal activity ofStoneX Pte Ltd is that of providing commodity and futures brokering and risk advisory services.StoneX Pte Ltd is regulated by theMonetary 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 ofJune 30, 2020 , we had total equity capital of$688.8 million , outstanding loans under revolving credit facilities of$313.8 million , and$518.9 million outstanding on our senior secured term loan and senior secured notes, net of deferred financing costs and original issue discount. A substantial portion of our assets are liquid. As ofJune 30, 2020 , approximately 95% 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 a 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. 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 58
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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 ourPhysical 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 and nine months endedJune 30, 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 ofJune 30, 2020 andSeptember 30, 2019 , were$12.4 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.StoneX Financial Inc. andStoneX Financial 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 ofStoneX Financial Inc. ,StoneX Financial Ltd andStoneX Pte Ltd are restricted from being transferred to their 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 ofJune 30, 2020 andSeptember 30, 2019 , the parent-holding company had cash and cash equivalents of$10.8 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 ofJune 30, 2020 , we had$426.6 million in undistributed foreign earnings. Repatriation of these amounts is not subject to additionalU.S. federal income tax but may 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 theU.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 repatriated$30.0 million and$13.0 million for the nine months endedJune 30, 2020 and 2019, respectively, of earnings previously taxed in theU.S. resulting in no significant incremental taxes upon repatriation. Therefore, the Company has not recognized a deferred tax liability on its investment in foreign subsidiaries. OnJune 11, 2020 , we completed the issuance and sale of$350 million in aggregate principal amount of our 8.625% Senior Secured Notes due 2025 (the "Notes") at the offering price of 98.5% of the aggregate principal amount. We had deposited the gross proceeds from the sale of the Senior Secured Notes into a segregated escrow account until the date that certain escrow release conditions were satisfied. The escrow release conditions included, among other things, the consummation of the merger of our wholly-owned subsidiary with Gain Capital Holdings Inc. ("Gain") as further discussed in Note 18. The escrow release conditions were satisfied onJuly 30, 2020 , in connection with the closing of the merger and the proceeds from the issuance of the Senior Secured Notes were released from escrow. We used the net proceeds from the sale of the Senior Secured Notes to fund the preliminary cash consideration for the merger of Gain on the closing date and to pay certain related transactions fees and expenses, and we intend to utilize the remaining proceeds to fund the repayment of Gain's 5.00% Convertible Senior Notes due 2022 ("the Gain Notes"). The consummation of the merger with Gain constituted a fundamental change and make-whole fundamental change under the terms of the Gain Notes' indenture. As a result, the holders of the Gain Notes are entitled to require us to repurchase the Gain Notes at a repurchase price equal to$1,002.36 per$1,000 principal amount onSeptember 1, 2020 . Alternatively, the holders of the Gain Notes may continue to hold such notes without exercising the repurchase right, in which case the Gain Notes will continue to bear interest at 5.00% and the notes will be convertible into the right to convert the principal amount of the Senior Secured Notes solely into cash in an amount equal to the conversion rate in effect on the conversion date multiplied by$6.00 . 59
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If any holder of the Gain Notes neither exercises such holder's fundamental change repurchase right or make-whole fundamental change conversion right, such holder's Gain Notes will remain outstanding. To the extent that any Gain Notes remain outstanding following the fundamental change repurchase date, we will be required to redeem the Senior Secured Notes in an amount equal to the aggregate principal amount of the Gain Notes that remain outstanding after the fundamental change repurchase date, at a redemption price equal to 100% of the principal amount of the Senior Secured Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date. The Notes will mature onJune 15, 2025 . Interest on the Senior Secured Notes accrues at a rate of 8.625% per annum and is payable semiannually in arrears onJune 15 andDecember 15 of each year, commencing onDecember 15, 2020 . We incurred debt issuance costs of$8.0 million in connection with the issuance of the Senior Secured Notes, which are being amortized over the term of the Senior Secured Notes under the effective interest method. We have the option to redeem all or a portion of the Senior Secured Notes at any time prior toJune 15, 2022 at a price equal to 100% of the principal amount of the Senior Secured Notes redeemed plus accrued and unpaid interest to the redemption date plus a "make-whole" premium. At any time on or afterJune 15, 2022 , we may redeem the Senior Secured Notes, in whole or in part, at the redemption prices set forth in the indenture. At any time beforeJune 15, 2022 , we may also redeem up to 40% of the aggregate principal amount of the Senior Secured Notes at a redemption price of 108.625% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption, with the proceeds of certain equity offerings. In addition, upon the earlier to occur of (x) a business combination between our subsidiaries that are registered in theUK and regulated by theFinancial Conduct Authority and (y) the one year anniversary of the date of issuance of the Senior Secured Notes, we may elect to redeem up to$100.0 million in aggregate principal amount of the Senior Secured Notes at a redemption price equal to 103% of the principal amount of the Senior Secured Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption. If we elect not to redeem the Senior Secured Notes, the holders of the Senior Secured Notes will have the right to require us to repurchase up to$100.0 million in aggregate principal amount of the Senior Secured Notes (or a lesser amount equal to the difference between$100.0 million and the amounts previously redeemed by us) at a purchase price equal to 103% of the principal amount of the Senior Secured Notes repurchased, plus accrued and unpaid interest, if any, to the date of repurchase. OnFebruary 22, 2019 , the Company amended its$262.0 million senior secured revolving credit facility, to extend the maturity date throughFebruary 2022 , and to increase the size of the facility to$350.0 million . During the nine months endedJune 30, 2020 , additional members were added to the syndication further increasing the committed amount to$393.0 million . As ofJune 30, 2020 , we had four committed bank credit facilities, totaling$739.0 million , of which$471.4 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
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.
• An unsecured syndicated loan facility, committed until
under which our subsidiary,
to
agreement. This facility is intended to provide short-term funding of
margin to commodity exchanges as necessary.
• A syndicated loan facility, committed until
our subsidiary,
agreement. The loan proceeds are used to finance commodity financing
arrangements and commodity repurchase agreements.
• An unsecured syndicated loan facility, committed until
under which our subsidiary,
to
agreement. This facility is intended to provide short-term funding of
margin to commodity exchanges as necessary.
As reflected above, $100.0 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. The terms and availability of
such new facilities or any other financing that we may seek in the future may be
impacted by economic and financial market conditions, including the impacts of
COVID-19, as well as our financial condition and results of operations at the
time we seek to enter into such new facilities or obtain such new financing.
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As of
borrow up to
receipts, to facilitate
subject to certain terms and conditions of the credit agreement.
• A secured uncommitted loan facility under which
borrow up to
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
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 June 30, 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 June 30, 2020 ,
interest expense directly attributable to trading activities includes $50.0
million in connection with trading activities conducted as an institutional
dealer in fixed income securities, and $32.2 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 June 30, 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, StoneX 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
subsidiary, StoneX Markets LLC ) and certain counterparties to exchange initial
margin, with phased-in compliance dates, with StoneX 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.
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Cash Flows We include client cash and securities segregated for regulatory purposes, as well as other restricted cash, in our consolidated cash flow statements. We hold a significant amount ofU.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 ofU.S. Treasury securities representing investment of clients' funds andU.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 segregatedU.S. Treasury securities that meet the aforementioned definition of a segregated cash equivalent mature and are replaced withU.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 ofSeptember 30, 2019 to$4,098.8 million as ofJune 30, 2020 , a net increase of$1,647.5 million . During the nine months endedJune 30, 2020 , net cash of$1,207.2 million was provided by operating activities,$15.3 million was used in investing activities and net cash of$458.3 million was provided by financing activities. Net cash provided by financing activities included a$21.5 million financing cash inflow related to additional members being added to our senior committed facility lending syndication during the current nine months ended, partially offset by required quarterly principal payments of$7.4 million made during the period against the senior term loan. There was also a financing cash inflow related to net borrowings on our revolving lines of credit with maturities of 90 days or less of$150.4 million during the the current nine months ended, which increased payables to lenders under loans. Additionally, we had a financing source of cash of$344.8 million related to the proceeds from our issuance of the Senior Secured Notes during the current quarter. Partially offsetting these financing cash inflows was a financing cash outflow related to 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. During the current nine months ended, we also had a financing use of cash related to the repurchase of 200,000 shares of our outstanding common stock in open market transactions, for an aggregate purchase price of$7.5 million . During the prior year, we had no repurchases of our outstanding common stock. We also had a partially offsetting financing cash outflow related to$9.2 million of deferred financing costs paid in connection with the issuance of the Senior Secured Notes and the renewal of our committed credit facilities during the the current nine months ended. We continuously evaluate opportunities to expand our business. Investing activities include$5.5 million in capital expenditures for property and equipment during the current nine months ended compared to$10.3 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$9.8 million in cash payments, net of cash received, for the acquisition of businesses during the current nine months ended compared to$28.0 million during the prior year. Further information about business acquisitions is contained in Note 18 to the Condensed Consolidated Financial Statements. 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. 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 for the following year. Any projections of future earnings and cash flows are subject to substantial uncertainty, particularly in light of the rapidly changing market and economic conditions created by the COVID-19 62
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pandemic. We may need to access debt and equity markets in the future if unforeseen costs or opportunities arise, to meet working capital requirements, fund acquisitions or investments or repay our indebtedness under credit facilities. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions as well as our financial condition and results of operations at the time we seek additional financing. Although we believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our operations for the foreseeable future, the challenges posed by COVID-19 on our business are expected to continue to shift rapidly. Consequently, we will continue to assess our liquidity needs and anticipated capital requirements in light of future developments, particularly those relating to COVID-19. 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, and 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 ofJune 30, 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 inU.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. 63
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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 statements as ofJune 30, 2020 andSeptember 30, 2019 , at fair value of the related financial instruments, totaling$728.3 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 toJune 30, 2020 , which might be partially or wholly offset by gains in the value of assets held as ofJune 30, 2020 . The totals of$728.3 million and$714.8 million include a net liability of$98.7 million and$58.1 million for derivatives, based on their fair value as ofJune 30, 2020 andSeptember 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 ofJune 30, 2020 andSeptember 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 InDecember 2019 , theFinancial 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. InJune 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. InNovember 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. InMay 2019 , the FASB issued ASU 64
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2019-05, which provides companies with more flexibility in applying the fair value option upon the adoption of ASU 2016-13. InApril 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 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, including: • 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 nine months endedJune 30, 2020 . [[Image Removed: mtmcht06302020.jpg]]In our Securities market-making and trading activities, we maintain inventories of equity and debt securities. In ourPhysical 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 withU.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 inU.S. Treasury bills, notes, and obligations issued by government sponsored entities, reverse repurchase agreements involvingU.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, net of unamortized deferred financing costs and original issue discount, which approximates fair value as ofJune 30, 2020 . As ofJune 30, 2020 ,$495.8 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 ofJune 30, 2020 , we had$336.9 million of outstanding fixed-rate long-term debt. 66
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