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14: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 64K
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Equity (Unaudited)
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Accounting Standards Adopted
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27: R16 Credit Facilities HTML 67K
28: R17 Securities and Commodity Financing Transactions HTML 96K
29: R18 Commitments and Contingencies HTML 35K
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31: R20 Revenue from Contracts with Clients HTML 101K
32: R21 Other Expenses HTML 39K
33: R22 Income Taxes HTML 34K
34: R23 Regulatory Capital Requirements HTML 42K
35: R24 Segment Analysis HTML 94K
36: R25 Pay vs Performance Disclosure HTML 38K
37: R26 Insider Trading Arrangements HTML 66K
38: R27 Basis of Presentation and Consolidation and HTML 55K
Accounting Standards Adopted (Policies)
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Accounting Standards Adopted (Details)
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55: R44 Earnings per Share - Narrative (Details) HTML 28K
56: R45 Assets and Liabilities, at Fair Value - Financial HTML 284K
Assets and Liabilities Measured at Fair Value
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Bad Debts (Details)
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Assets by Major Class (Details)
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Future Amortization Expense (Details)
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Financing Bridge Commitment (Details)
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Collateral Maturities of Gross Obligations
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Underlying Collateral Types of Gross Obligations
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Carrying Value of Collateral Pledged, Received and
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(Address of principal executive offices) (Zip Code)
i(212)i485-3500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name
of each exchange on which registered
iCommon Stock, $0.01 par value
iSNEX
iThe
Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer, ” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge accelerated
filer
x
Accelerated filer
☐
Non-accelerated filer
o
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
Cash,
securities and other assets segregated under federal and other regulations (including $i3.5 million and $i5.8 million at fair value at December 31, 2023
and September 30, 2023, respectively)
i2,774.6
i2,426.3
Collateralized
transactions:
Securities purchased under agreements to resell
i3,799.8
i2,979.5
Securities
borrowed
i994.5
i1,129.1
Deposits
with and receivables from broker-dealers, clearing organizations and counterparties, net (including $i3,769.3 million and $i4,248.3 million at
fair value at December 31, 2023 and September 30, 2023, respectively)
i7,474.1
i7,443.8
Receivable
from clients, net (including $i1.1 million and $(i7.9) million at fair value at December 31, 2023 and September 30, 2023,
respectively)
i825.6
i683.1
Notes receivable, net
i5.3
i5.2
Income
taxes receivable
i20.8
i25.1
Financial instruments owned, at fair value (includes securities pledged as collateral that can be sold or repledged
of $i1,870.2 million and $i1,466.4 million at December 31,
2023 and September 30, 2023, respectively)
i5,064.4
i5,044.8
Physical
commodities inventory, net (including $i314.4 million and $i386.5 million at fair value at December 31, 2023 and September 30,
2023, respectively)
i518.4
i537.3
Deferred tax asset
i37.4
i45.4
Property
and equipment, net
i127.0
i123.5
Operating right of use assets
i137.9
i122.1
Goodwill
and intangible assets, net
i80.5
i82.4
Other assets
i226.9
i182.8
Total
assets
$
i23,244.8
$
i21,938.7
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Accounts payable and other accrued liabilities (including $i1.6 million and $i1.5
million at fair value at December 31, 2023 and September 30, 2023, respectively)
Broker-dealers,
clearing organizations and counterparties (including $i51.5 million and $i10.2 million at fair value at December 31, 2023 and September 30,
2023, respectively)
i541.5
i442.4
Lenders
under loans
i418.5
i341.0
Senior secured borrowings, net
i342.9
i342.1
Income
taxes payable
i41.2
i38.2
Deferred tax liability
i8.8
i8.1
Collateralized
transactions:
Securities sold under agreements to repurchase
i6,054.2
i4,526.6
Securities
loaned
i942.7
i1,117.3
Financial instruments sold, not yet purchased, at fair value
i2,748.0
i3,085.6
Total
liabilities
i21,762.0
i20,559.6
Commitments and contingencies (Note 11)
i
i
Stockholders'
equity:
Preferred stock, $ii0.01/
par value. Authorized ii1,000,000/ shares; iiiino///
shares issued or outstanding
i—
i—
Common
stock, $ii0.01/ par value. Authorized ii200,000,000/
shares; i35,405,165 issued and i31,494,180 outstanding at December 31, 2023 and i35,105,852
issued and i31,194,867 outstanding at September 30, 2023
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
The following table provides a reconciliation of cash, segregated cash, cash equivalents, and segregated cash equivalents reported within the Condensed Consolidated Balance Sheets.
December
31,
(in millions)
2023
2022
Cash and cash equivalents
$
i1,157.6
$
i1,252.1
Cash
segregated under federal and other regulations(1)
i2,771.1
i2,298.6
Securities
segregated under federal and other regulations(1)
i—
i0.1
Cash
segregated and deposited with or pledged to exchange-clearing organizations and other futures commission merchants (“FCMs”)(2)
i1,455.3
i2,141.0
Securities
segregated and pledged to exchange-clearing organizations(2)
i881.1
i1,718.9
Total
cash, segregated cash, cash equivalents, and segregated cash equivalents shown in the condensed consolidated statements of cash flows
$
i6,265.1
$
i7,410.7
(1)
Represents segregated client cash held at third-party banks. Excludes segregated commodity warehouse receipts, segregated U.S. Treasury obligations with original or acquired maturities of greater than 90 days, and other assets of $i3.5 million and $i19.9 million
as of December 31, 2023 and 2022, respectively, included within Cash, securities and other assets segregated under federal and other regulations on the Condensed Consolidated Balance Sheets.
(2) Represents segregated client cash and U.S. Treasury obligations on deposit with, or pledged to, exchange clearing organizations and other FCMs. Excludes non-segregated cash, segregated U.S. Treasury obligations pledged to exchange-clearing organizations with original or acquired maturities greater than 90 days, and other assets of $i5,137.7
million and $i3,016.3 million as of December 31, 2023 and 2022, respectively, included within Deposits with and receivables from broker-dealers, clearing organizations, and counterparties, net on the Condensed Consolidated Balance
Sheets.
See accompanying notes to the condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – iBasis
of Presentation and Consolidation and Accounting Standards Adopted
StoneX Group Inc., a Delaware corporation, and its consolidated subsidiaries (collectively “StoneX” or “the Company”), is a global financial services network that connects companies, organizations, traders and investors to the global market ecosystem through a unique blend of digital platforms, end-to-end clearing and execution services, high touch service, and deep expertise. The Company strives to be the one trusted partner to its clients, providing its network, products and services to allow them to pursue trading opportunities, manage their market risks, make investments and improve
their business performance. The Company offers a vertically integrated product suite, beginning with high-touch and electronic access to nearly all major financial markets worldwide, as well as numerous liquidity venues. The Company delivers access and services through the entire lifecycle of a trade, by delivering deep market expertise and on-the-ground intelligence, best execution, and finally post-trade clearing, custody, as well as settlement services. The Company has created revenue streams, diversified by asset class, client type and geography, that earn commissions, spreads, and principal revenue as clients execute transactions across its financial network, while monetizing non-trading client activity including
interest and fee earnings on client balances as well as earning consulting fees for market intelligence and risk management services.
The Company provides its services to a diverse group of clients in more than i180 countries. These clients include more than i54,000
commercial, institutional, and payments clients and over i400,000 retail clients. The Company’s clients include commercial entities, asset managers, regional, national and introducing broker-dealers, insurance companies, brokers, institutional investors and professional traders, commercial and investment banks and government and non-governmental organizations (“NGOs”).
The Company’s common stock trades on The NASDAQ
Global Select Market under the symbol “SNEX”.
Basis of Presentation and Consolidation
i
The accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2023, which has been derived from the audited consolidated balance sheet of September 30, 2023, and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures
normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. The Company believes that the included disclosures clearly and fairly present the information within. In management’s opinion, all adjustments, generally consisting of normal accruals, considered necessary to fairly present the condensed consolidated financial statements for the interim periods presented have been reflected as required by Rule 10-01 of Regulation S-X.
Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the
Company’s audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023, as filed with the SEC on November 24, 2023.
i
These condensed consolidated financial statements include the accounts of StoneX Group Inc. and all entities in which the Company has a controlling financial interest.
All material intercompany transactions and balances have been eliminated in consolidation.
i
The Company’s fiscal year end is September 30, and its fiscal quarters end on December 31, March 31, June 30 and September 30. Unless otherwise stated, all dates refer to fiscal years and fiscal interim periods.
i
Preparing
condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant of these estimates and assumptions relate to fair value measurement for financial instruments, revenue recognition, valuation of inventories, and income taxes. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any necessary
adjustments prior to financial statement issuance. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates. Estimates and assumptions were considered and made in context with the information reasonably available to the Company as of December 31, 2023 and through the date of this Form 10-Q.
In the Condensed Consolidated Income Statements, the total revenues reported combine gross revenues for the physical commodities business and net revenues for all other businesses. The subtotal Operating revenues in the Condensed
Consolidated Income Statements is calculated by deducting Cost of sales of physical commodities from Total revenues. The subtotal Net operating revenues in the Condensed Consolidated Income Statements is calculated as Operating revenues less Transaction-based clearing expenses, Introducing broker commissions, Interest expense, and Interest expense on corporate funding. Transaction-based clearing expenses represent variable expenses paid to executing brokers, exchanges, clearing organizations
and banks in relation to transactional volumes. Introducing broker commissions include commission paid to certain non-employee third parties that have introduced clients to the Company. Net operating revenues represent revenues available to pay variable compensation to risk management consultants and traders, direct non-variable expenses, as well as variable and non-variable expenses to operational and administrative employees.
Common Stock Split
On November 7, 2023, the Company’s Board of Directors approved a three-for-two split of its common stock, to be effected as a
stock dividend. The stock split was effective on November 24, 2023, and entitled each shareholder of record as of November 17, 2023 to receive one additional share of common stock for every two shares owned and cash in lieu of fractional shares.
The stock split increased the number of shares of common stock outstanding. All share and per share amounts contained herein have been retroactively adjusted for the stock split.
The shares of common stock retain a par value of $i0.01
per share. Accordingly, an amount equal to the par value of the increased shares resulting from the stock split was reclassified from Additional paid-in-capital to Common stock.
i
Gain on acquisition
Gain on acquisition represents the value that the Company acquired in excess of consideration paid for business combinations. On October 31, 2022, the
Company’s wholly owned subsidiary, StoneX Netherlands B.V., acquired CDI-Societe Cotonniere De Distribution S.A. The fair value of identifiable net assets acquired was approximately $i66.2 million and the purchase price was approximately $i42.7 million.
This resulted in a gain on acquisition of $i23.5 million for the three months ended December 31, 2022.
iThe
Company presents basic and diluted earnings per share (“EPS”) using the two-class method, which requires all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends and therefore participate in undistributed earnings with common stockholders be included in computing earnings per share. Under the two-class method, net income is reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees and directors contain non-forfeitable rights to dividends at the same rate as common stock and are considered participating securities. Basic EPS has been computed by dividing net income by the weighted-average number of common shares outstanding.
i
The
following is a reconciliation of the numerator and denominator of the diluted earnings per share computations for the periods presented below.
Three Months Ended December 31,
(in millions, except share amounts)
2023
2022
Numerator:
Net
income
$
i69.1
$
i76.6
Less:
Allocation to participating securities
(i2.4)
(i2.4)
Net
income allocated to common stockholders
$
ii66.7/
$
ii74.2/
Denominator:
Weighted
average number of:
Common shares outstanding
i30,233,107
i29,657,724
Dilutive
potential common shares outstanding:
Share-based awards
i1,041,200
i1,092,054
Diluted
weighted-average common shares
i31,274,307
i30,749,778
/
The
dilutive effect of share-based awards is reflected in diluted net income per share by applying the treasury stock method, which includes consideration of unamortized share-based compensation expense.
Options to purchase i272,888 and i125,352
shares of common stock for the three months ended December 31, 2023 and 2022, respectively, were excluded from the calculation of diluted earnings per share as they would have been anti-dilutive.
Fair value is defined by U.S. GAAP as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants on the measurement date.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Even when market assumptions are not readily available, the Company is required to develop a set of assumptions that reflect those that market participants would use in pricing an asset or liability at the measurement date. The Company uses prices and
inputs that are current as of measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.
The Company has designed independent price verification controls to mitigate risks related to the reasonableness of such prices.
Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
A market is active if there are sufficient transactions on an ongoing basis to provide current pricing information for the asset or liability, pricing information is released publicly, and price quotations do not vary substantially either over time or among market participants. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.
Relevant guidance requires the Company to consider counterparty credit risk of all parties to outstanding derivative instruments that would be considered by a market participant in the transfer or settlement of such contracts (exit price). The
Company’s exposure to credit risk on derivative financial instruments principally relates to the portfolio of Over-the-counter (“OTC”) derivative contracts as all exchange-traded contracts held can be settled on an active market with a credit guarantee from the respective exchange. The Company requires each counterparty to deposit margin collateral for all OTC instruments and is also required to deposit margin collateral with counterparties. The Company has assessed the nature of these deposits and used its discretion to adjust each based on the underlying credit considerations for the counterparty and determined
that the collateral deposits minimize the exposure to counterparty credit risk in the evaluation of the fair value of OTC instruments as determined by a market participant.
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurement,the Company groups its assets and liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 - Valuation is based upon unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 1 consists of financial
assets and liabilities whose fair values are estimated using quoted market prices.
Level 2 - Valuation is based upon quoted prices for identical or similar assets or liabilities in markets that are less active, that is, markets in which there are few transactions for the asset or liability that are observable for substantially the full term. Included in Level 2 are those financial assets and liabilities for which fair values are estimated using models or other valuation methodologies. These models are primarily industry-standard models that consider various observable inputs, including time value, yield curve, volatility factors, observable current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures.
Level 3 - Valuation is based on prices or valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e., supported by little or no market activity). Level 3 comprises financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are not readily observable from objective sources. Level 3 includes contingent liabilities that have been valued using an income approach based upon management developed discounted cash flow projections, which are an unobservable input.
Fair value of financial and nonfinancial assets and liabilities that are carried on the Condensed Consolidated Balance Sheets at fair value on a recurring basis
Cash and cash equivalents reported at fair value on a recurring basis includes certificates of deposit and money market mutual funds, which are stated at cost plus accrued interest, which approximates fair value.
Cash,
securities and other assets segregated under federal and other regulations reported at fair value on a recurring basis include the value of pledged investments, primarily U.S. Treasury obligations and commodities warehouse receipts.
Deposits with and receivables from broker-dealers, clearing organizations and counterparties and payable to clients and broker-dealers, clearing organizations and counterparties includes the fair value of pledged investments, primarily U.S. Treasury
obligations and foreign government obligations. These balances also include the fair value of exchange-traded options on futures and OTC
forwards, swaps and options.
Financial instruments owned and sold, not yet purchased include the fair value of equity securities, which includes common, preferred, and foreign ordinary shares, American Depository Receipts (“ADRs”), Global Depository Receipts (“GDRs”), and exchange-traded funds (“ETFs”), corporate and municipal bonds, U.S. Treasury obligations, U.S. government agency obligations, foreign government obligations, agency mortgage-backed obligations, asset-backed obligations, derivative financial instruments, commodities warehouse receipts, exchange firm common stock, and investments in managed funds. The fair value of exchange firm common stock is determined by quoted market prices.
Cash equivalents, debt and equity securities, commodities warehouse receipts, physical commodities inventory, derivative financial instruments and contingent liabilities
are carried at fair value, on a recurring basis, and are classified and disclosed into three levels in the fair value hierarchy.
The following section describes the valuation methodologies used by the Company to measure classes of financial instruments at fair value and specifies the level within the fair value hierarchy where various financial instruments are classified.
The Company uses quoted prices in active markets, where available, and classifies instruments with such quotes within Level 1 of the fair value hierarchy. Examples include U.S. Treasury obligations, foreign government obligations, commodities warehouse receipts, certain equity securities traded in active markets, physical precious metals inventory
held by a regulated broker-dealer subsidiary, exchange firm common stock, investments in managed funds, as well as options on futures contracts traded on national exchanges. The fair value of exchange firm common stock is determined by recent sale transactions and is included within Level 1.
When instruments are traded in secondary markets and observable prices are not available for substantially the full term, the Company generally relies on internal valuation techniques based upon observable inputs for comparable financial instruments, or prices obtained from third-party pricing services or brokers or a combination thereof, and accordingly, classified these instruments as Level 2. Examples include corporate and municipal bonds, U.S. government agency
obligations, agency-mortgage backed obligations, asset-backed obligations, certain equity securities traded in less active markets, and OTC derivative contracts, which include purchase and sale commitments related to the Company’s foreign exchange, agricultural, and energy commodities.
Certain derivatives without a quoted price in an active market and derivatives executed OTC are valued using internal valuation techniques, including pricing models which utilize significant inputs observable to market participants. The valuation techniques and inputs depend on the type of derivative and the nature of the underlying instrument. The key inputs depend upon the type of derivative and the nature of the underlying instrument and include interest yield curves,
foreign exchange rates, commodity prices, volatilities and correlation. These derivative instruments are included within Level 2 of the fair value hierarchy.
Physical commodities inventory includes precious metals that are a part of the trading activities of a regulated broker-dealer subsidiary and is recorded at fair value using exchange-quoted prices. Physical commodities inventory also includes agricultural commodities that are a part of the trading activities of a non-broker dealer subsidiary and are recorded at net realizable value using exchange-quoted prices. The fair value of precious metals physical commodities inventory is based upon unadjusted exchange-quoted prices and is, therefore, classified within Level 1 of the fair value hierarchy. The fair value of agricultural physical commodities inventory and the related OTC firm sale and purchase commitments are generally based upon exchange-quoted prices, adjusted for
basis or differences in local markets, broker or dealer quotations or market transactions in either listed or OTC markets. Exchange-quoted prices are adjusted for location and quality because the exchange-quoted prices for agricultural and energy related products represent contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. The basis or local market adjustments are observable inputs or have an insignificant impact on the measurement of fair value and, therefore, the agricultural physical commodities inventory, as well as the related OTC forward firm sale and purchase commitments have been included within Level 2 of the fair value hierarchy.
With the exception of certain derivative instruments where the valuation approach is disclosed above, financial
instruments owned and sold are primarily valued using third-party pricing sources. Third-party pricing vendors compile prices from various sources and often apply matrix pricing for similar securities when market-observable transactions for the instruments are not observable for substantially the full term. The Company reviews the pricing methodologies used by third-party pricing vendors in order to evaluate the fair value hierarchy classification of vendor-priced financial instruments and the accuracy of vendor pricing, which typically involves comparing of primary vendor prices to internal trader prices or secondary vendor prices. When evaluating the propriety of vendor-priced financial instruments using secondary prices, considerations include the range and quality of vendor prices, level of observable transactions for identical and similar instruments, and judgments based upon knowledge
of a particular market and asset class. If the primary vendor price does not represent fair value, justification for using a secondary price, including source data used to make the determination, is subject to review and approval by authorized
personnel prior to using a secondary price. Financial instruments owned and sold that are valued using third party pricing sources are included within either Level 1 or Level 2 of the fair value hierarchy based upon the observability of the inputs used and the level of activity in the market.
The fair value estimates presented herein are based on pertinent information available
to management as of December 31, 2023 and September 30, 2023. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
The
following tables set forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis, as of December 31, 2023 and September 30, 2023 by level in the fair value hierarchy. All fair value measurements were performed on a recurring basis as of December 31, 2023 and September 30, 2023.
Securities
and other assets segregated under federal and other regulations
i5.8
i—
i—
i—
i5.8
U.S.
Treasury obligations
i4,023.8
i—
i—
i—
i4,023.8
To
be announced and forward settling securities
i—
i73.5
i—
(i31.7)
i41.8
Foreign
government obligations
i17.8
i—
i—
i—
i17.8
Derivatives
i5,497.5
i1,135.9
i—
(i6,468.5)
i164.9
Deposits
with and receivables from broker-dealers, clearing organizations and counterparties, net
i9,539.1
i1,209.4
i—
(i6,500.2)
i4,248.3
Receivables
from clients, net - Derivatives
i61.7
i561.3
i
(i630.9)
(i7.9)
Equity
securities
i324.0
i10.3
i—
i—
i334.3
Corporate
and municipal bonds
i—
i284.2
i—
i—
i284.2
U.S.
Treasury obligations
i531.7
i—
i—
i—
i531.7
U.S.
government agency obligations
i—
i451.7
i—
i—
i451.7
Foreign
government obligations
i43.3
i—
i—
i—
i43.3
Agency
mortgage-backed obligations
i—
i2,865.8
i—
i—
i2,865.8
Asset-backed
obligations
i—
i138.8
i—
i—
i138.8
Derivatives
i0.6
i868.1
i—
(i600.2)
i268.5
Commodities
leases
i—
i16.0
i—
i—
i16.0
Commodities
warehouse receipts
i54.7
i—
i—
i—
i54.7
Exchange
firm common stock
i12.0
i—
i—
i—
i12.0
Cash
flow hedges
i—
i1.7
i—
i—
i1.7
Mutual
funds and other
i39.3
i—
i2.8
i—
i42.1
Financial
instruments owned
i1,005.6
i4,636.6
i2.8
(i600.2)
i5,044.8
Physical
commodities inventory
i240.3
i146.2
i—
i—
i386.5
Total
assets at fair value
$
i10,919.0
$
i6,553.5
$
i2.8
$
(i7,731.3)
$
i9,744.0
Liabilities:
Accounts payable and other accrued liabilities - contingent liabilities
$
i—
$
i—
$
i1.5
$
i—
$
i1.5
Payables
to clients - Derivatives
i5,430.7
i226.2
i
(i5,577.1)
i79.8
To
be announced and forward settling securities
i—
i47.5
i—
(i31.4)
i16.1
Derivatives
i112.2
i1,402.0
i—
(i1,520.1)
(i5.9)
Payable
to broker-dealers, clearing organizations and counterparties
i112.2
i1,449.5
i—
(i1,551.5)
i10.2
Equity
securities
i230.6
i5.5
i—
i—
i236.1
Foreign
government obligations
i21.5
i—
i—
i—
i21.5
Corporate
and municipal bonds
i—
i81.6
i—
i—
i81.6
U.S.
Treasury obligations
i2,409.3
i—
i—
i—
i2,409.3
U.S.
government agency obligations
i—
i5.1
i—
i—
i5.1
Agency
mortgage-backed obligations
i—
i31.7
i—
i—
i31.7
Derivatives
i2.4
i769.2
i—
(i510.4)
i261.2
Cash
flow hedges
i—
i27.1
i—
i—
i27.1
Other
i—
i10.9
i1.1
i—
i12.0
Financial
instruments sold, not yet purchased
i2,663.8
i931.1
i1.1
(i510.4)
i3,085.6
Total
liabilities at fair value
$
i8,206.7
$
i2,606.8
$
i2.6
$
(i7,639.0)
$
i3,177.1
(1)Represents
cash collateral and the impact of netting across at each level of the fair value hierarchy.
Realized and unrealized gains and losses are included in Principal gains, net, Interest income, and Cost of sales of physical commodities in the Condensed Consolidated Income Statements.
Additional disclosures about the fair value of financial instruments that are not carried on the Condensed Consolidated Balance Sheets at fair value
Many,
but not all, of the financial instruments that the Company holds are recorded at fair value in the Condensed Consolidated Balance Sheets. The following represents financial instruments for which the ending balance at December 31, 2023 and September 30, 2023 was not carried at fair value on the Condensed Consolidated Balance Sheets in accordance with U.S. GAAP:
Short-term financial instruments:The carrying value of short-term financial instruments, including cash and cash equivalents, cash segregated under federal and other regulations, securities purchased under agreements to resell and securities sold under agreements to repurchase, and securities borrowed and loaned are
recorded at amounts that approximate the fair value of these instruments due to their short-term nature and level of collateralization. These financial instruments generally expose the Company to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market rates. Under the fair value hierarchy, cash and cash equivalents and cash segregated under federal and other regulations are classified as Level 1. Securities purchased under agreements to resell and securities sold under agreements to repurchase, and securities borrowed and loaned are classified as Level 2 under the fair value hierarchy as they are generally overnight or short-term in nature and are collateralized by equity securities, U.S. Treasury obligations, U.S. government agency obligations, agency mortgage-backed obligations, and asset-backed obligations.
Receivables
and other assets:Receivables from broker-dealers, clearing organizations, and counterparties, receivables from clients, net, notes receivables, and certain other assets are recorded at amounts that approximate fair value due to their short-term nature and are classified as Level 2 under the fair value hierarchy.
Payables:Payables to clients and payables to broker-dealers, clearing organizations, and counterparties are recorded at amounts that approximate fair value due to their short-term nature and are classified as Level 2 under the fair value hierarchy.
Lenders under loans: Payables to lenders under loans carry variable rates of interest and thus approximate fair value and are classified as Level 2 under the fair
value hierarchy.
Senior secured borrowings, net: Senior secured borrowings, net includes the Company's i8.625% Senior Secured Notes due 2025 (the “Senior Secured Notes”), as further described in Note 9, with a carrying value of $i342.9
million as of December 31, 2023. The carrying value of the Senior Secured Notes represent their principal amount net of unamortized deferred financing costs and original issue discount. As of December 31, 2023, the Senior Secured Notes had a fair value of $i351.9 million and are classified as Level 2 under the fair value hierarchy.
Note 4 – iFinancial
Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk
The Company is party to certain financial instruments with off-balance sheet risk in the normal course of its business. The Company has sold financial instruments that it does not currently own and will therefore be obliged to purchase such financial instruments at a future date to settle these transactions. The Company has recorded these obligations in the condensed consolidated financial statements as of December 31, 2023 and September 30, 2023 at the fair values of the related financial instruments.
The Company will incur losses if the fair value of the underlying financial instruments increases subsequent to December 31, 2023. The total financial instruments sold, not yet purchased of $i2,748.0 million and $i3,085.6
million as of December 31, 2023 and September 30, 2023, respectively, includes $i237.5 million and $i261.2
million for derivative contracts not designated as hedges, respectively, which represented a liability to the Company based on their fair values as of December 31, 2023 and September 30, 2023.
Derivatives
The Company utilizes derivative products in its trading capacity as a dealer in order to satisfy client needs and mitigate risk. The Company manages risks from both derivatives and non-derivative cash instruments on a consolidated basis. The
risks of derivatives should not be viewed in isolation, but in aggregate with the Company’s other trading activities. The Company’s derivative positions are included in the Condensed Consolidated Balance Sheets in Deposits with and receivables from broker-dealers, clearing organizations and counterparties, Receivables from clients, net, Financial instruments owned and sold, not yet purchased, at fair value, Payable to clients and Payables to broker-dealers, clearing organizations and counterparties.
Listed below are the fair values of the Company’s derivative assets and liabilities as of December 31, 2023 and September 30, 2023. Assets represent net unrealized gains and liabilities represent net unrealized losses.
The Company’s derivative contracts are principally held in its Institutional, Commercial, and Retail segments. The Company provides its Institutional segment clients access to exchanges at which they can carry out their trading strategies. The Company assists its Commercial segment clients in protecting the value of their future
production by entering into option or forward agreements with them on an OTC basis. The Company also provides its Commercial segment clients with exchange products, including combinations of buying and selling puts and calls. In its Retail segment, the Company provides its retail clients with access to spot foreign exchange, precious metals trading, as well as contracts for difference (“CFD”) and spread bets, where permitted. The Company mitigates its risk by generally offsetting the client’s transaction simultaneously with one of the Company’s
trading counterparties or will offset that transaction with a similar but not identical position on the exchange. The risk mitigation of these offsetting trades is not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC. These derivative contracts are traded along with cash transactions because of the integrated nature of the markets for these products. The Company manages the risks associated with derivatives on an aggregate basis along with the risks associated with its proprietary trading and market-making activities in cash instruments as part of its firm-wide risk management policies. In particular, the risks related to derivative positions may be partially offset by inventory, other derivatives, or cash collateral paid or received.
Hedging
Activities
The Company uses interest rate derivatives, in the form of swaps, to hedge risk related to variability in overnight rates. These hedges are designated cash flow hedges, through which the Company mitigates uncertainty in its interest income by converting floating-rate interest income to fixed-rate interest income. While the swaps mitigate interest rate risk, they do introduce credit risk, which is the possibility that the Company’s trading counterparty fails to meet its obligation. The Company minimizes this risk by entering into its swaps with highly-rated, multi-national institutions. In
addition to credit risk, there is market risk associated with the swap positions. The Company’s market risk is limited, because any amounts the Company must pay from
having exchanged variable interest will be funded by the variable interest the Company receives on its deposits. As of December 31, 2023, the
Company’s hedges will all have matured in less than i1 year from the end of the current period.
The Company also uses foreign currency derivatives, in the form of forward contracts, to hedge risk related to the variability in exchange rates relative to certain of the Company’s non-USD expenditures. These hedges are designated
cash flow hedges, through which the Company mitigates variability in exchange rates by exchanging foreign currency for USD at fixed exchange rates at a pre-determined future date, or several cash flows at several pre-determined future dates. While the forward contracts mitigate exchange rate variability risk, they do introduce credit risk, which is the possibility that the Company’s trading counterparty fails to meet its obligation. The Company minimizes this risk by entering into its forward contracts with highly-rated, multi-national institutions.
These hedges will all mature within i2 years from the end of the current period.
The Company assesses the effectiveness of its hedges at each reporting period to identify any required reclassifications into current earnings. During the three months ended December 31, 2023 and 2022, the Company did not designate any portion
of its hedges as ineffective and thus did not have any values in current earnings related to ineffective hedges. iThe fair values of derivative instruments designated for hedging held as of December 31, 2023 and September 30, 2023 are as follow:
Foreign currency forward contracts to purchase Polish Zloty:
Local currency
zł
i156.1
zł
i156.1
USD
$
i34.9
$
i34.0
Foreign
currency forward contracts to purchase British Pound Sterling:
Local currency
£
i144.0
£
i168.0
USD
$
i177.3
$
i206.9
/i
The
Condensed Consolidated Income Statement effects of derivative instruments designated for hedging held for the three months ended December 31, 2023 and 2022 are as follows:
Total
derivatives designated as hedging instruments
$
(i14.0)
$
(i5.6)
Amount
of gain reclassified from accumulated other comprehensive income into income as a result of a forecasted transaction that is no longer probable of occurring
$
i—
$
i—
i
The
accumulated other comprehensive income effects of derivative instruments designated for hedging held for three months ended December 31, 2023 and 2022 are as follows:
Amount of Gain Recognized in Other Comprehensive Income on Derivatives, net of tax
The
following table sets forth the Company’s net gains/(losses) related to derivative financial instruments for the three months ended December 31, 2023 and 2022 in accordance with the Derivatives and Hedging Topic of the ASC. The net gains/(losses) set forth below are included in Principal gains, net and Cost of sales of physical commodities in the Condensed Consolidated Income Statements.
In the normal course of business, the Company purchases and sells financial instruments, commodities and foreign currencies as either a principal or agent on behalf of its clients. If either the client or counterparty fails to perform, the Company may be required to discharge the obligations of the nonperforming party. In such circumstances, the Company may sustain a loss if the fair value of the financial instrument, commodity, or foreign currency is different from the contract value of the transaction.
The majority of the
Company’s transactions and, consequently, the concentration of its credit exposure are with commodity exchanges, clients, broker-dealers and other financial institutions. These activities primarily involve collateralized and uncollateralized arrangements and may result in credit exposure in the event that a counterparty fails to meet its contractual obligations. The Company’s exposure to credit risk can be directly impacted by volatile financial markets, which may impair counterparties’ ability to satisfy contractual obligations. The Company seeks to control its credit risk through a variety of reporting and control procedures, including establishing credit and/or position limits based upon a review of the counterparties’ financial condition and credit ratings. The
Company monitors collateral levels on a daily basis for compliance with regulatory and internal guidelines and requests changes in collateral levels as appropriate.
The Company is a party to financial instruments in the normal course of its business through client and proprietary trading accounts in exchange-traded and OTC derivative instruments. These instruments are primarily the result of the execution of orders for commodity futures, options on futures, OTC swaps and options and spot and forward foreign currency contracts on behalf of its clients, substantially all of which are transacted on a margin basis. Such transactions may expose the Company to significant
credit risk in the event that margin requirements are not sufficient to fully cover losses which clients may incur. The Company controls the risks associated with these transactions by requiring clients to maintain margin deposits in compliance with individual exchange regulations and internal guidelines. The Company monitors required margin levels daily, and therefore, may require clients to deposit additional collateral or reduce positions when necessary. The Company also establishes credit limits for clients, which are monitored daily. The Company evaluates each client’s creditworthiness on a case by case
basis. Clearing, financing, and settlement activities may require the Company to maintain funds with or pledge securities as collateral with other financial institutions. Generally, these exposures to both clients and exchanges are subject to master netting, or client agreements, which reduce the exposure to the Company by permitting receivables and payables with such clients to be offset in the event of a client default. Management believes that the margin deposits held as of December 31, 2023 and September 30, 2023 were adequate to minimize the risk of material loss that could be created by positions held at that time. Additionally, the
Company monitors collateral fair value on a daily basis and adjusts collateral levels in the event of excess market exposure.
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 consolidated balance sheets. Exposure to market risk is influenced by a number of factors, including the relationships between the financial instruments and the Company’s positions, as well as the volatility and liquidity in the markets in which the financial instruments are traded. The principal risk components of financial instruments include, among other things, interest rate volatility, the duration of the underlying instruments and changes
in commodity pricing and foreign exchange rates. The Company attempts to manage its exposure to market risk through various techniques. Aggregate market limits have been established and market risk measures are routinely monitored against these limits.
Note 5 – iAllowance for Doubtful Accounts
The allowance for doubtful accounts related to deposits with and receivables
from broker-dealers, clearing organizations, and counterparties was $i0.2 million as of December 31, 2023 and $i0.1
million as of September 30, 2023. The allowance for doubtful accounts related to receivables from clients was $i59.7 million and $i59.8 million as of December 31,
2023 and September 30, 2023, respectively. The Company had iino/
allowance for doubtful accounts related to notes receivable as of December 31, 2023 and September 30, 2023.
i
Activity in the allowance for doubtful accounts for the three months ended December 31, 2023 was as follows:
Precious
metals - held by broker-dealer subsidiary
i174.6
i240.3
Precious
metals - held by non-broker-dealer subsidiaries
i204.0
i150.8
Physical
commodities inventory, net
$
i518.4
$
i537.3
(1) Physical Ag & Energy consists
of agricultural commodity inventories, including corn, soybeans, wheat, dried distillers grain, canola, sorghum, coffee, cocoa, cotton, and various energy commodity inventories. Agricultural inventories have reliable, readily determinable and realizable market prices, have relatively insignificant costs of disposal and are available for immediate delivery. The Company records changes to these values in Cost of sales of physical commodities on the Condensed Consolidated Income Statements.
/
Note 7 – iGoodwill
i
Goodwill allocated to the Company’s operating segments is as follows:
Total
intangible assets not subject to amortization
i5.7
—
i5.7
i5.6
—
i5.6
Total
intangible assets
$
i48.8
$
(i27.6)
$
i21.2
$
i76.5
$
(i53.4)
$
i23.1
/
Amortization
expense related to intangible assets was $i2.0 million and $i3.9 million for the three months ended December 31, 2023 and 2022, respectively.
The
Company wrote off $i27.8 million of fully amortized intangible assets during the three months ended December 31, 2023.
i
As
of December 31, 2023, the estimated future amortization expense was as follows:
(in millions)
Fiscal 2024 (remaining nine months)
$
i4.7
Fiscal
2025
i3.6
Fiscal 2026
i2.8
Fiscal
2027
i2.2
Fiscal 2028 and thereafter
i2.2
Total
intangible assets subject to amortization
$
i15.5
/
Note 9 – iCredit
Facilities
Committed Credit Facilities
The Company and its subsidiaries have committed credit facilities under which they may borrow up to $i1,200.0 million, subject to the terms and conditions of these facilities. The amounts outstanding under these credit facilities carry variable rates of interest, thus approximating
fair value. The committed credit facilities generally have covenant requirements that relate to various leverage, debt to net worth, fixed charge, tangible net worth, excess net capital, or profitability measures. The Company and its subsidiaries were in compliance with all relevant covenants as of December 31, 2023.
Uncommitted Credit Facilities
The Company has access to certain uncommitted financing agreements that support its ordinary course securities and commodities inventories. The agreements are subject to certain borrowing terms and conditions.
Note
Payable to Bank
The Company has notes payable to a commercial bank related to the financing of certain equipment which secures the notes.
Senior Secured Notes
The Company issued its Senior Secured Notes in June 2020. The Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior second lien secured basis, by certain subsidiaries of the Company that guarantee the Company’s senior
committed credit facility and by Gain Capital Holdings, Inc. and certain of its domestic subsidiaries.
The Company incurred debt issuance costs of $i9.5 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. Since June 15, 2022, the
Company has had the right to redeem the Senior Secured Notes, in whole or in part, at the redemption prices set forth in the indenture. The notes will mature on June 15, 2025.
The following table sets forth a listing of credit facilities, the current
committed amounts as of the report date on the facilities, and outstanding (in millions, except for percentages):
(1)
The StoneX Group Inc. senior committed credit facility is a revolving facility secured by substantially all of the assets of StoneX Group Inc. and certain subsidiaries identified in the credit facility agreement as obligors, and pledged equity of certain subsidiaries identified in the credit facility as limited guarantors. The maturity date remains April 21, 2025 for ione lender
representing $i42.5 million of the facility commitment.
(2) The Senior Secured Notes and the related guarantees are secured by liens on substantially all of the Company’s and the guarantors’ assets, subject to certain customary and other exceptions and permitted liens. The liens on the assets that secure the Senior Secured Notes and the related guarantees are contractually subordinated to the liens on the assets that secure the
Company’s and the guarantors’ existing and future first lien secured indebtedness, including indebtedness under the Company’s senior committed credit facility.
(3) Amounts outstanding under the Senior Secured Notes are reported net of unamortized original issue discount of $i5.1 million and $i5.8
million, in the respective periods presented.
(4) Included in Senior secured borrowings, net on the Condensed Consolidated Balance Sheets.
(5) Included in Lenders under loans on the Condensed Consolidated Balance Sheets.
/
As reflected above, certain of the Company’s committed credit facilities are scheduled to expire during the next twelve months following the quarterly period ended December 31, 2023. The
Company intends to renew or replace these facilities as they expire, and based on the Company’s liquidity position and capital structure, the Company believes it will be able to do so.
Note 10 – iSecurities
and Commodity Financing Transactions
The Company’s repurchase agreements and securities borrowing and lending arrangements are generally recorded at cost in the Condensed Consolidated Balance Sheets, which is a reasonable approximation of their fair values due to their short-term nature. Secured borrowing and lending arrangements are entered into to obtain collateral necessary to effect settlement, finance inventory positions, meet customer needs or re-lend as part of our dealer operations. The fair value of securities loaned and borrowed is monitored daily compared with the related payable or receivable, and additional collateral or returning excess collateral is requested, as appropriate. These arrangements may serve to limit credit risk resulting from our transactions with our counterparties. Financial instruments are pledged as collateral
under repurchase agreements, securities lending agreements and other secured arrangements, including clearing arrangements. Agreements with counterparties generally contain contractual provisions allowing counterparties the right to sell or repledge collateral. Either the Company or its counterparties may require additional collateral. All collateral is held by the Company or a custodian.
i
The
following tables set forth the carrying value of repurchase agreements, and securities lending agreements by remaining contractual maturity (in millions):
The following table sets forth the carrying value of repurchase agreements and securities lending agreements by class of collateral pledged (in millions):
Total
securities sold under agreement to repurchase
$
i10,090.7
$
i9,196.4
Securities
loaned
Equity securities
$
i942.7
$
i1,117.3
Total
securities loaned
i942.7
i1,117.3
Gross amount of secured financing
$
i11,033.4
$
i10,313.7
The
following tables provide the netting of securities purchased under agreements to resell, securities sold under agreements to repurchase, securities borrowed and securities loaned as of the periods indicated (in millions):
Amounts Offset in the Condensed Consolidated Balance Sheet
Net Amounts Presented in the Condensed Consolidated Balance Sheet
Securities purchased under agreements to resell
$
i7,649.3
$
(i4,669.8)
$
i2,979.5
Securities
borrowed
$
i1,129.1
$
—
$
i1,129.1
Securities
sold under agreements to repurchase
$
i9,196.4
$
(i4,669.8)
$
i4,526.6
Securities
loaned
$
i1,117.3
$
—
$
i1,117.3
/
The
Company pledges securities owned as collateral in both tri-party and bilateral arrangements. Pledged securities under tri-party arrangements may not be repledged or sold by the Company’s counterparties, whereas bilaterally pledged securities may be. The approximate fair value of pledged securities that can be sold or repledged by the Company’s counterparties has been parenthetically disclosed on the Condensed Consolidated Balance Sheets.
The Company receives securities as collateral under reverse repurchase agreements, securities borrowed agreements, and margin securities held on behalf of counterparties. This collateral is used by the
Company to cover financial instruments sold, not yet purchased; to obtain financing in the form of repurchase agreements; and to meet counterparties’ needs under lending arrangement and matched-booked trading strategies. Additional securities collateral is obtained as necessary to ensure such transactions are adequately collateralized. In many instances, the Company is permitted by contract to repledge the securities received as collateral, which may include pledges to cover collateral requirements for tri-party repurchase agreements.
Securities pledged or repledged to cover collateral requirements for tri-party arrangements
$
i5,321.7
$
i4,726.6
Securities
received as collateral that may be repledged
$
i9,133.0
$
i9,180.1
Securities
received as collateral that may be repledged covering securities sold short
$
i2,130.6
$
i2,461.1
Repledged
securities borrowed and client securities held under custodial clearing arrangements to collateralize securities loaned agreements
$
i911.9
$
i1,097.3
/
Note
11 – iCommitments and Contingencies
Contingencies
The Company had receivables, net of collections and other allowable deductions, of $i15.2 million
as of December 31, 2023, due from account holders in connection with the OptionSellers matter previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023. The allowance against these uncollected balances was $i4.6 million as of December 31, 2023. The
Company is pursuing collection of the uncollected balances through arbitration proceedings against the account holders. The Company will consider developments in these proceedings, and any other relevant matters, in determining whether any changes in the allowance against the uncollected balances are required.
In these and other arbitration proceedings, clients are seeking damages from StoneX Financial Inc. related to the trading losses in their accounts.
During the three months ended December 31, 2023, the Company favorably resolved several of these arbitration claims through arbitration decisions and privately negotiated settlements. All of the arbitration panels
that issued decisions during the period awarded StoneX Financial Inc. the full amount of the uncollected balances. As noted, several of the arbitrations were resolved through privately negotiated settlement, pursuant to which the account holders agreed to pay some or all of their outstanding deficit balances. The Company intends to continue vigorously pursuing claims through arbitration and settling cases in what the Company determines to be appropriate circumstances. The ultimate outcome of remaining arbitrations cannot presently be determined.
Depending on future collections and the outcomes of arbitration proceedings, any provisions for bad debts and actual losses may be material to the
Company’s financial results. However, the Company believes that the likelihood of a material adverse outcome is remote, and does not currently believe that any potential losses related to this matter would impact its ability to comply with its ongoing liquidity, capital, and regulatory requirements.
Legal Proceedings
From time to time and in the ordinary course of business, the Company is involved in various legal actions and proceedings, including tort claims, contractual disputes, employment matters, workers’ compensation claims and collections. The Company carries insurance that provides protection against certain types of
claims, up to the relevant policy’s limits.
On November 13, 2023, BTIG filed a civil complaint (the “BTIG complaint) against the Company and StoneX Financial Inc. in San Francisco Superior Court (CGC-23-610525) seeking monetary damages and injunctive relief for, among other things, alleged theft of purported trade secrets by former BTIG employees later employed at StoneX. The Company intends to vigorously defend itself. In addition, the Company subsequently received from the U.S. Department of Justice (the “DOJ”) and the SEC subpoenas that the
Company believes are related to conduct alleged in the BTIG complaint, and the Company is cooperating with these agencies. The ultimate outcomes of the BTIG complaint and the DOJ and SEC subpoenas cannot presently be determined.
As of December 31, 2023 and September 30, 2023, the Condensed Consolidated Balance Sheets include loss contingency accruals which are not material, individually or in the aggregate, to the Company’s financial position or liquidity. In the opinion of management, possible exposure from loss contingencies in excess of the amounts accrued, is not likely to be material to the
Company’s earnings, financial position or liquidity.
Contractual Commitments
Self-Insurance
The Company self-insures its costs related to medical and dental claims. The Company is self-insured, up to a stop loss amount, for eligible participating employees and retirees, and for qualified dependent medical and dental claims, subject to deductibles and limitations. As of December 31, 2023, the Company had $i1.8 million
accrued for self-insured medical and dental claims included in Accounts payable and other accrued liabilities in the Condensed Consolidated Balance Sheet.
Note 12 – iAccumulated Other
Comprehensive Loss, Net
Accumulated other comprehensive loss, net consists of net income and other gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income. Other comprehensive income includes net actuarial losses from defined benefit pension plans, foreign currency translation adjustments, and cash flow hedge gains or losses. See note 4 for additional information on cash flow hedges.
i
The following table summarizes the changes in accumulated other comprehensive
loss, net for the three months ended December 31, 2023.
The Company accounts for revenue earned from contracts with clients for services such as the execution, clearing, brokering, and custody of futures and options on futures contracts, OTC derivatives,
and securities, investment management, and underwriting services in accordance with FASB ASC 606, Revenues from Contracts with Customers (Topic 606). Revenues for these services are recognized when the performance obligations related to the underlying transaction are completed.
Revenues are recognized when control of the promised goods or services are transferred to clients, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Revenues are analyzed to determine whether the Company is the principal (i.e., reports revenue on a gross basis) or agent (i.e., reports revenues on a net basis) in the contract.
Principal or agent designations depend primarily on the control an entity has over the good or service before control is transferred to a client. The indicators of which party exercises control include primary responsibility over performance obligations, inventory risk before the good or service is transferred, and discretion in establishing the price.
Topic 606 does not apply to revenues associated with dealing, or market-making, activities in financial instruments or contracts in the capacity of a principal, including derivative sales contracts which result in physical settlement and interest income.
Revenues within the scope of Topic 606 are presented within Commission and clearing fees;
Consulting, management, and account fees; and Sales of physical commodities on the Condensed Consolidated Income Statements. Revenues that are not within the scope of Topic 606 are presented within Sales of physical commodities, Principal gains, net, and Interest income on the Condensed Consolidated Income Statements.
i
Three
Months Ended December 31,
(in millions)
2023
2022
Revenues from contracts with clients as a percentage of total revenues
The following table represents a disaggregation of the Company’s total revenues separated between revenues from contracts with clients and other sources of revenue for the periods indicated.
The substantial majority of the Company’s performance obligations for revenues from contracts with clients are satisfied at a point in time and are typically collected from clients by debiting their accounts with the Company.
Commission and clearing fees revenue and Consulting, management, and account fees revenue are primarily related to the Commercial, Institutional and Retail reportable segments. Sales of physical commodities under topic 606 are primarily related to the
Company’s Commercial and Retail segments. Principal gains, net are contributed by all of the Company’s reportable segments. Interest income is primarily related to the Commercial and Institutional reportable segments. Precious metals trading and agricultural and energy product trading revenues are primarily related to the Commercial reportable segment. Precious metals sales that are recognized on a point-in-time basis are included in the Retail and the Commercial reportable segments
Principal gains, net also includes dividend income on long equity positions and dividend expense on short equity positions, which are recognized on the ex-dividend date. iThe
following table indicates the relevant income and expense:
Three Months Ended December 31,
(in millions)
2023
2022
Dividend income on long equity positions
$
i20.2
$
i14.2
Dividend
expense on short equity positions
i18.8
i13.2
Dividend income, net reported within Principal
Gains, net
$
i1.4
$
i1.0
Remaining Performance Obligations
Remaining
performance obligations are services that the Company has committed to perform in the future in connection with its contracts with clients. The Company’s remaining performance obligations are generally related to its risk management consulting and asset management contracts with clients. Revenues associated with remaining performance obligations related to these contracts with clients are not material to the overall consolidated results of the Company.
For the Company’s asset management activities, where fees are calculated based on a percentage of the fair value of eligible assets in client’s accounts, future revenue associated with remaining performance obligations cannot be determined as such fees are subject to fluctuations in the fair value of eligible assets in clients’ accounts.
Note 14 – iOther Expenses
i
Other
expenses consisted of the following, for the periods indicated.
Three Months Ended December 31,
(in millions)
2023
2022
Non-income taxes
$
i2.5
$
i4.7
Insurance
i2.9
i2.7
Employee
related expenses
i1.9
i3.6
Other direct business expenses
i4.4
i4.0
Membership
fees
i0.9
i0.8
Director and public company expenses
i0.5
i0.5
Office
expenses
i0.6
i0.4
Other expenses
i3.2
i2.7
Total
other expenses
$
i16.9
$
i19.4
/
Note
15 – iIncome Taxes
i
The income tax provision for interim periods comprises income tax on ordinary income (loss) at the most recent estimated annual effective income tax rate, adjusted for the income tax effect of discrete items. Management uses an estimated annual effective income tax rate based on the forecasted pretax income/(loss) and statutory tax
rates in the various jurisdictions in which the Company operates. The Company’s effective income tax rate differs from the U.S. statutory income tax rate primarily due to state and local taxes, global intangible low taxed income (“GILTI”), and differing statutory tax rates applied to the income of non-U.S. subsidiaries. The Company records the tax effect of certain discrete items, including the effects of changes in tax laws, tax rates and adjustments with respect to valuation allowances or other unusual or nonrecurring tax adjustments, in the interim period in which they occur, as an addition to, or reduction from, the
income tax provision, rather than being included in the estimated effective annual income tax rate. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no income tax benefit can be recognized are excluded from the estimated annual effective income tax rate.
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. The Company is required to assess its deferred tax assets and the need for a valuation allowance at each reporting period. This
assessment requires judgment on the part of management with respect to benefits that may be realized. The Company will record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of the deferred tax assets will not be realized.
Current and Prior Period Tax Expense
Income tax expense of $i26.6 million and $i19.0
million for the three months ended December 31, 2023 and 2022, respectively, reflects estimated federal, foreign, state and local income taxes.
The Company’s effective tax rate was i28% and i20%
for the three months ended December 31, 2023 and 2022, respectively. The effective tax rate was higher than the U.S. federal statutory rate of 21% for the three months ended December 31, 2023 due to U.S. state and local taxes, GILTI, U.S. and foreign permanent differences, and the amount of foreign earnings taxed at higher rates. The three months ended December 31, 2022 included the Gain on acquisition, which was non-taxable, and lowered the tax rate in comparison to the three months ended December 31, 2023.
Note 16 – iRegulatory
Capital Requirements
The Company’s activities are subject to significant governmental regulation, both in the U.S. and in the international jurisdictions in which it operates. Subsidiaries of the Company were in compliance with all of their minimum capital regulatory requirements as of December 31, 2023. iThe
following table details those subsidiaries with minimum capital regulatory requirements in excess of $i10.0 million along with the actual balance maintained as of that date. /
Certain
other subsidiaries of the Company, typically with a minimum requirement less than $i10.0 million, are also subject to net capital requirements promulgated by authorities in the countries in which they operate. As of December 31, 2023, all of the Company’s subsidiaries
were in compliance with their local minimum capital regulatory requirements.
Note 17 – iSegment Analysis
The Company’s operating segments are principally based on the nature of the clients we serve (commercial, institutional, and retail), and a fourth operating segment, its payments business. The
Company manages its business in this manner due to its large global footprint, in which it has approximately i4,000 employees allowing it to serve clients in more than i180 countries.
The
Company’s business activities are managed as operating segments, which are our reportable segments for financial statement purposes as shown below.
•Commercial
•Institutional
•Retail
•Payments (previously disclosed as Global Payments)
Commercial
The Company offers commercial clients a comprehensive array of products and services, including risk management and hedging services, execution and clearing of exchange-traded and OTC products, voice brokerage, market intelligence and physical trading, as well as commodity
financing and logistics services. The ability to provide these high-value-added products and services differentiates the Company from its competitors and maximizes the opportunity to retain clients.
Institutional
The Company provides institutional clients with a complete suite of equity trading services to help them find liquidity with best execution, consistent liquidity across a robust array of fixed income products, 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. In addition, the Company
originates, structures and places debt instruments in the international and domestic capital markets. These instruments include asset-backed securities (primarily in Argentina) and domestic municipal securities.
The Company provides retail clients around the world access to over i18,000
global financial markets, including spot foreign exchange ("forex"), both financial trading and physical investment in precious metals, as well as contracts for difference (“CFDs”), which are investment products with returns linked to the performance of underlying assets. In addition, its independent wealth management business offers a comprehensive product suite to retail investors in the U.S.
Payments
The Company provides customized foreign exchange and treasury services to banks and commercial businesses, as well as charities and non-governmental organizations and government organizations. The Company provides
transparent pricing and offers payments services in more than i180 countries and i140 currencies, which it believes is more than any other payments solution provider.
********
The
total revenues reported combine gross revenues from physical contracts for subsidiaries that are not broker-dealers and net revenues for all other businesses. In order to reflect the way that the Company’s management views the results, the table below also reflects the segment contribution to ‘operating revenues’, which is shown on the face of the consolidated income statements and which is calculated by deducting physical commodities cost of sales from total revenues.
Segment data includes the profitability measure of net contribution by segment. 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 the Company’s resources. Net contribution is calculated as revenue less direct cost of sales, transaction-based clearing expenses, variable compensation, introducing broker commissions, and interest expense. Variable compensation paid to risk management consultants/traders generally represents a fixed percentage of revenues generated, and in some cases, revenues generated less transaction-based clearing expenses, base salaries and an overhead allocation.
Segment data also includes segment income which is calculated as net contribution less non-variable direct expenses of the segment. These non-variable direct expenses include trader base compensation and benefits, operational employee compensation and benefits, communication and data services, business development, professional fees, bad debt expense and other direct
expenses.
Inter-segment revenues, expenses, receivables and payables are eliminated upon consolidation.
Total revenues, operating revenues and net operating revenues shown in the table below as “Corporate” primarily consist of interest income from the Company’s centralized corporate treasury function. In the normal course of operations, the Company operates a centralized corporate treasury function in which it may sweep excess cash from certain subsidiaries, where permitted within regulatory limitations, in exchange for a short-term interest bearing intercompany payable, or provide excess cash to subsidiaries
in exchange for a short-term interest bearing intercompany receivable in lieu of the subsidiary borrowing on external credit facilities. The intercompany receivables and payables are eliminated during consolidation.
“Overhead costs and expenses” include costs and expenses of certain shared services such as information technology, accounting and treasury, credit and risk, legal and compliance, and human resources and other activities. These amount represent the gross overhead costs and expenses, before any allocation of overhead costs to operating segments.
Information
for the reportable segments is shown in accordance with the Segment Reporting Topic of the ASC as follows:
Three Months Ended December 31,
(in millions)
2023
2022
Total revenues:
Commercial
$
i18,978.0
$
i12,293.5
Institutional
i435.7
i343.5
Retail
i101.7
i316.2
Payments
i60.6
i55.4
Corporate
i9.2
i12.8
Eliminations
(i12.2)
(i9.8)
Total
$
i19,573.0
$
i13,011.6
Operating
revenues:
Commercial
$
i198.4
$
i182.4
Institutional
i435.7
i343.5
Retail
i92.5
i70.5
Payments
i60.6
i55.4
Corporate
i9.2
i12.8
Eliminations
(i12.2)
(i9.8)
Total
$
i784.2
$
i654.8
Net
operating revenues (loss):
Commercial
$
i163.4
$
i152.7
Institutional
i148.6
i143.2
Retail
i67.0
i43.9
Payments
i58.2
i53.3
Corporate
(i15.6)
(i11.1)
Total
$
i421.6
$
i382.0
Net
contribution:
(Revenues less cost of sales of physical commodities, transaction-based clearing expenses, variable compensation, introducing broker commissions and interest expense)
Commercial
$
i126.4
$
i115.7
Institutional
i100.2
i94.6
Retail
i62.6
i39.2
Payments
i47.6
i42.1
Total
$
i336.8
$
i291.6
Segment
income:
(Net contribution less non-variable direct segment costs)
Commercial
$
i87.2
$
i82.8
Institutional
i65.2
i62.0
Retail
i28.7
(i4.2)
Payments
i35.0
i32.3
Total
$
i216.1
$
i172.9
Reconciliation
of segment income to income before tax:
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Throughout this document, unless the context otherwise requires, the terms “Company”, “we”, “us” and “our” refer to StoneX Group Inc. and its consolidated subsidiaries.
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 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, United States (“U.S.”) federal and U.S. state securities laws, and the impact of changes in technology in the securities and commodities trading industries. 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
We operate a global financial services network that connects companies, organizations, traders and investors to the global market ecosystem through a unique blend of digital platforms, end-to-end clearing and execution services, high touch service and deep expertise. We strive to be the one trusted partner to our clients, providing our network, product and services to allow them to pursue trading opportunities, manage their market risks, make investments and improve their business
performance. Our businesses are supported by our global infrastructure of regulated operating subsidiaries, our advanced technology platform and our team of approximately 4,000 employees as of December 31, 2023. 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. For additional information, see Overview of Business and Strategy within “Item 1. Business” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
We report our operating segments based primarily on the nature of the clients we serve
(commercial, institutional, and retail), and a fourth operating segment, our payments business. See Segment Information, below, for a listing of business activities performed within our reportable segments.
Common Stock Split
On November 7, 2023, our Board of Directors approved a three-for-two split of its common stock, to be effected as a stock dividend. The stock split was effective on November 24, 2023, and entitled each shareholder of record as of November 17, 2023 to receive one additional share of common stock for every two shares owned and cash in lieu of fractional shares.
The stock split increased the number of shares of common stock outstanding. All share and per share amounts contained
herein have been retroactively adjusted for the stock split.
Executive Summary
In the first quarter of fiscal 2024, our continued efforts to increase client engagement and expand our product offerings resulted in continued growth in transactional volumes across many of our key products, including listed and OTC derivatives as well as securities products. However, a general decline in market volatility led to a narrowing of spreads captured compared to the prior year, with the exception of FX / CFD contracts, which experienced a strong rebound in rate per million, or RPM, versus weak performance in the prior year.
In addition, we
continued to experience growth in interest and fee income earned on client balances, which increased 14% compared to the prior year, principally as a result of increases in short term interest rates, offset by a 25% decline in average client equity from record levels experienced in the prior year, as well as a 31% decline in average money-market/FDIC sweep balances.
Operating revenues increased $129.4 million, or 20%, to $784.2 million in the three months ended December 31, 2023 compared to $654.8 million in the three months ended December 31, 2022, with all of our segments experiencing growth versus the prior year, led by our Institutional and Retail segments which added $92.2 million and $22.0 million, respectively, compared to the three months ended December 31, 2022. Additionally,
our Commercial and Payments segments added $16.0 million and $5.2 million, respectively, compared to the three months ended December 31, 2022.
Overall segment income increased $43.2 million, or 25%, compared to the three months ended December 31, 2022, with all of our segments experiencing growth versus the prior year, led by our Retail segment which added $32.9 million compared to the three months ended December 31, 2022. Our Commercial segment income increased $4.4 million compared to the three months ended December 31, 2022, while our Institutional and Payments segments, increased $3.2 million
and $2.7 million, respectively, compared to the three months ended December 31, 2022.
Interest expense paid on client balances declined $0.2 million, to $36.3 million, compared to the three months ended December 31, 2022. Interest expense related to corporate funding purposes decreased $1.2 million to $13.2 million in the three months ended December 31, 2023 compared to $14.4 million in the three months ended December 31, 2022.
On the expense side, we continue to focus on maintaining our variable cost model and limiting the growth of our non-variable
expenses. Variable expenses were 54% of total expenses, in both the three months ended December
31, 2023 and 2022. Non-variable expenses, excluding bad debts, increased $13.6 million compared to the three months ended December 31, 2022, principally due to higher fixed compensation and benefits, non-trading technology and support, travel and business development and trading system and market information.
Net income decreased $7.5 million to $69.1 million in the three months ended December 31, 2023 compared to $76.6 million in the three months ended December 31, 2022. Net income in the three months ended December 31, 2022, included a non-taxable $23.5 million gain on the acquisition of CDI-Societe Cotonniere De Distribution S.A. (“CDI”), which is included in Gain
on acquisition in the Condensed Consolidated Income Statement. Diluted earnings per share were $2.13 for the three months ended December 31, 2023 compared to $2.41 in the three months ended December 31, 2022.
30
Selected Summary Financial Information
Results of Operations
Our total revenues, as reported, combine gross revenues for the physical commodities business and net revenues
for all other businesses. Management believes that operating revenues, which deduct the cost of sales of physical commodities from total revenues, is a more useful financial measure with which to assess our results of operations.The table below sets forth our operating revenues, as well as other key financial measures, for the periods indicated.
The
tables below present operating revenues disaggregated across the key products we provide to our clients and select operating data and metrics used by management in evaluating our performance, for the periods indicated.
All $ amounts are U.S. dollar or U.S. dollar equivalents
Give-up
fee revenue, related to contract execution for clients of other FCMs, as well as cash and voice brokerage revenues are excluded from the calculation of listed derivatives, average rate per contract.
(2)
Interest expense associated with our fixed income activities is deducted from operating revenues in the calculation of Securities RPM, while interest income related to securities lending is excluded.
Operating revenues increased $129.4 million, or 20%, to $784.2 million in the three months ended December 31, 2023 compared to $654.8 million in the three months ended December 31, 2022.
Operating revenues derived from listed derivatives increased $9.4 million, or 9%, to $109.2 million in the three months ended December 31, 2023 compared to $99.8 million in the three months ended December 31, 2022. This increase was principally due to a 26% increase in listed derivative contract volumes,
partially offset by a 13% decline in the average rate per contract compared to the three months ended December 31, 2022.
Operating revenues derived from OTC derivatives increased $2.0 million, or 5%, to $44.5 million in the three months ended December 31, 2023 compared to $42.5 million in the three months ended December 31, 2022. The increase was the result of a 14% increase in OTC derivative contract volumes, partially offset by a 9% decline in the average rate per contract compared to the three months ended
December 31, 2022.
32
Operating revenues derived from securities transactions increased $82.1 million, or 35%, to $316.2 million in the three months ended December 31, 2023 compared to $234.1 million in the three months ended December 31, 2022. This increase was principally due to a 47% increase in ADV, as well as a significant increase in interest rates. Carried interest on fixed income securities is a component of operating revenues, however interest expense associated with financing these positions is not. We deduct interest expense associated with our fixed income activities from operating revenues in the calculation of
securities RPM in the table above in order to provide a more useful measure of the financial performance of our securities business. Net operating revenues derived from securities transactions increased $2.5 million, or 3%, to $95.9 million in the three months ended December 31, 2023 compared to $93.4 million in the three months ended December 31, 2022. This increase was principally due to the increase in ADV noted above, which was partially offset by a 30% decline in the RPM resulting from the tightening of spreads and a change in product mix, compared to the three months ended December 31, 2022.
Operating revenues derived from FX/CFD contracts increased $25.8 million, or 53%, to $74.6
million in the three months ended December 31, 2023 compared to $48.8 million in the three months ended December 31, 2022, principally due to a 73% increase in the FX/CFD RPM, which was partially offset by a 15% decline in the FX/CFD contracts ADV, compared to the three months ended December 31, 2022.
Operating revenues from payments increased $5.2 million, or 10%, to $59.4 million in the three months ended December 31, 2023 compared to $54.2 million in the three months ended December 31, 2022, principally driven by a 10% increase in the RPM, compared to the three months ended December
31, 2022.
Operating revenues derived from physical contracts declined $8.3 million, or 14%, to $51.4 million in the three months ended December 31, 2023 compared to $59.7 million in the three months ended December 31, 2022. This decrease was driven by declines in both our physical agricultural and energy and retail precious metals businesses, compared to the three months ended December 31, 2022.
Interest and fee income earned on client balances, which is associated with our listed and OTC derivatives, correspondent clearing, and independent wealth management product offerings, increased $12.2 million, or 14%, to $98.4 million in the three months
ended December 31, 2023 compared to $86.2 million in the three months ended December 31, 2022. The increase was principally driven by a significant increase in short-term interest rates.
Expenses were higher in our Exchange-Traded Futures & Options, Financial Ag and Energy and LME businesses, principally related to the increase in contracts traded, and expenses were higher in the Equity Capital Markets business, principally related to the increased ADV. Partially offsetting these increases were lower expenses in the Retail Forex business, principally related to reducing costs through successful renegotiation of certain vendor contracts.
Expenses were higher in our Financial Ag and Energy business, principally due to increased volume
and client mix traded, and higher in our Physical Ag and Energy business, principally due to an additional month of expenses resulting from the CDI acquisition, which was effective October 31, 2022, as well as growth in the physical cotton business following acquisition. Expenses were also higher in our Independent Wealth Management business, principally due to increased revenues. These increases were partially offset by lower payouts within our Retail Forex and Exchange-Traded Futures & Options businesses.
Short-term financing facilities of subsidiaries and other direct interest of operating segments
13.0
13.6
(0.6)
(4)
%
236.0
154.3
81.7
53
%
Corporate
funding
13.2
14.4
(1.2)
(8)
%
Total interest expense
$
249.2
$
168.7
$
80.5
48
%
Increased
interest expense attributable to trading activities principally resulted from an increase in our fixed income and securities borrowing activities, as well as the effect of the increase in short-term interest rates. The decrease in interest expense attributable to corporate funding was principally due to lower average borrowings on our revolving credit facility, partially offset by the higher short-term interest rates.
Net Operating Revenues
Net operating revenues is one of the key measures used by management to assess operating segment performance. 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.
The table below presents a disaggregation of consolidated net operating revenues used by management in evaluating our performance, for the periods indicated:
Compensation and Other Expenses: Compensation and other expenses increased $16.0 million, or 5%, to $325.9 million in the three months ended December 31, 2023 compared to $309.9 million in the three months ended December
31, 2022.
Compensation and Benefits:
Three Months Ended December 31,
(in millions)
2023
2022
$ Change
%
Change
Compensation and benefits:
Variable compensation and benefits
Front office
$
99.3
$
100.8
$
(1.5)
(1)%
Administrative,
executive, and centralized and local operations
22.6
17.7
4.9
28%
Total variable compensation and benefits
121.9
118.5
3.4
3%
Variable compensation and benefits as a percentage
of net operating revenues
29%
31%
Fixed compensation and benefits:
Non-variable salaries
72.0
61.4
10.6
17%
Employee
benefits and other compensation, excluding share-based compensation
16.6
13.5
3.1
23%
Share-based compensation
7.6
5.6
2.0
36%
Total fixed compensation and benefits
96.2
80.5
15.7
20%
Total
compensation and benefits
218.1
199.0
19.1
10%
Total compensation and benefits as a percentage of operating revenues
28%
30%
Number of employees, end of period
4,192
3,725
467
13%
Non-variable
salaries increased principally due to the increase in headcount resulting from expanding capabilities among our business lines, as well as the growth in our operational and overhead departments supporting our business growth, and the impact of annual merit increases.
Employee benefits and other compensation, excluding share-based compensation, increased principally due to higher payroll taxes, benefits, retirement costs, and severance. Share-based compensation, which contains stock option and restricted stock expense, increased principally due to higher employee participation in the Company’s restricted stock plan.
Other Expenses: Other non-compensation expenses decreased $3.1 million, or 3%, to $107.8 million in the three months ended December
31, 2023 compared to $110.9 million in the three months ended December 31, 2022.
Non-trading technology and support increased $2.1 million, principally due to higher non-trading software maintenance and support costs related to various IT systems primarily within our Core IT and other overhead departments.
35
Occupancy and equipment rental costs decreased $1.2 million, principally due to a partial refund of property rates covering prior years in London.
Travel and business development increased $1.4 million, principally due to increased business development spend in our Commercial and Institutional segments, as well as higher travel
costs.
Depreciation and amortization decreased $1.5 million, principally due to lower amortization, as certain intangibles, recognized as part the acquisition of Gain Capital Holdings, Inc. in fiscal 2020, became fully amortized during fiscal 2023, partially offset by incremental depreciation expense from internally developed software placed into service.
During the three months ended December 31, 2023, we recorded net recoveries of bad debts of $0.3 million, principally related to recoveries within our Institutional segment. During the three months ended December 31, 2022, bad debts, net of recoveries were $0.7 million, principally related to client trading account deficits in our Commercial and Retail segments.
Gain on Acquisition:
The results of the three months ended December 31, 2022 included a nonrecurring gain of $23.5 million related to the acquisition of CDI.
Provision for Taxes: The effective income tax rate was 28% and 20% in the three months ended December 31, 2023 and 2022, respectively. The effective tax rate for the three months ended December 31, 2023 was higher than the U.S. federal statutory rate of 21% due to U.S. state and local taxes, GILTI, U.S. and foreign permanent differences, and the amount of foreign earnings taxed at higher rates.The effective tax rate for the three months ended December 31, 2022 was lower than
the U.S. federal statutory rate of 21% due to the permanent difference for a non-taxable gain on acquisition, which reduced the effective income tax rate by 6.5%.
Variable vs. Fixed Expenses
The table below presents our variable expenses and non-variable expenses as a percentage of total non-interest expenses for the periods indicated.
Three
Months Ended December 31,
(in millions)
2023
% of Total
2022
% of Total
Variable compensation and benefits
$
121.9
28%
$
118.5
29%
Transaction-based
clearing expenses
74.3
17%
67.3
16%
Introducing broker commissions
39.1
9%
36.8
9%
Total
variable expenses
235.3
54%
222.6
54%
Fixed compensation and benefits
96.2
22%
80.5
19%
Other
fixed expenses
108.1
24%
110.2
27%
Bad debts (recoveries), net
(0.3)
—%
0.7
—%
Total
non-variable expenses
204.0
46%
191.4
46%
Total non-interest expenses
$
439.3
100%
$
414.0
100%
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. We seek to make our non-interest expenses variable to the greatest extent possible, and to keep our fixed costs as low as possible.
During the three months ended December 31, 2023, non-variable expenses, excluding bad debts (recoveries), net, increased $13.6 million, or 7%, compared to the three months ended December 31, 2022.
36
Segment
Information
Our operating segments are based principally on the nature of the clients we serve (commercial, institutional, and retail), and a fourth operating segment, our payments business. We manage our business in this manner due to our large global footprint, in which we have more than 4,000 employees allowing us to serve clients in more than 180 countries.
Our business activities are managed as operating segments, which are our reportable segments for financial reporting purposes, as shown below.
StoneX
Group Inc.
Commercial
Institutional
Retail
Payments
Primary
Activities:
Primary Activities:
Primary Activities:
Primary Activities:
Financial Ag & Energy
Equity Capital Markets
Retail Forex
Payments
LME Metals
Debt Capital Markets
Retail Precious
Metals
Payment Technology Services
Physical Ag & Energy
FX Prime Brokerage
Independent Wealth Management
Precious Metals
Exchange-Traded Futures & Options
Correspondent Clearing
Operating
revenues, net operating revenues, net contribution and segment income are some of the key measures used by management to assess the performance of each segment and for decisions regarding the allocation of our resources. Operating revenues are calculated as total revenues less cost of sales of physical commodities.
Net operating revenues are calculated as operating revenues less transaction-based clearing expenses, introducing broker commissions and interest expense.
Net contribution is calculated as net operating revenues less variable compensation. Variable compensation paid to risk management consultants and traders generally represents a fixed percentage that can vary by revenue type. This fixed percentage is applied to revenues generated, and in some cases, revenues generated less transaction-based clearing expenses, base salaries and other expenses/allocations.
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.
Segment income is used by our chief operating decision maker (“CODM”) as the primary measure of segment profit or loss in the evaluation for each of our operating segments. During the three months ended December 31, 2023, we revised our method of allocating certain overhead costs to our operating segments, and, beginning in the three months ended December 31, 2023, the CODM also uses ‘Segment income, less allocation of overhead costs’ as an additional segment measure of our segments’
financial performance. The allocation of overhead costs to operating segments includes costs associated with compliance, technology, and credit and risk costs. The share of allocated costs is based on resources consumed by the relevant businesses. In addition, the allocation of human resources and occupancy costs is principally based on employee costs within the relevant businesses. The measure of segment profit or loss most consistent with the corresponding amounts in the consolidated financial statements is segment income.
In the accompanying segment tables, ‘Allocation of overhead costs’ has been added beneath ‘Segment income’, which reconciles the segment income measure to the segment income, less allocation of overhead costs measure for the three months ended December 31, 2023.
37
Total
Segment Results
The following table shows summary information concerning all of our business segments combined.
Three Months Ended December 31,
(in millions)
2023
% of Operating Revenues
2022
%
of Operating Revenues
Revenues:
Sales of physical commodities
$
18,820.9
$
12,403.4
Principal gains, net
293.4
255.3
Commission
and clearing fees
130.3
118.6
Consulting, management, and account fees
38.1
39.2
Interest income
293.3
192.1
Total
revenues
19,576.0
13,008.6
Cost of sales of physical commodities
18,788.8
12,356.8
Operating revenues
787.2
100%
651.8
100%
Transaction-based
clearing expenses
74.0
9%
67.1
10%
Introducing broker commissions
39.1
5%
36.8
6%
Interest expense
236.9
30%
154.8
24%
Net
operating revenues
437.2
393.1
Variable direct compensation and benefits
100.4
13%
101.5
16%
Net contribution
336.8
291.6
Fixed
compensation and benefits
49.5
45.1
Other fixed expenses
71.5
72.9
Bad debts (recoveries), net
(0.3)
0.7
Total
non-variable direct expenses
120.7
15%
118.7
18%
Segment income
216.1
172.9
Allocation
of overhead costs (1)
38.2
—
Segment income, less allocation of overhead costs
$
177.9
$
172.9
(1)Includes an allocation of certain overhead costs to our operating segments
as noted above for the three months ended December 31, 2023. These allocations will be provided on an ongoing basis but have not been calculated for comparable periods.
Net contribution for all of our business segments increased $45.2 million, or 16%, to $336.8 million in the three months ended December 31, 2023 compared to $291.6 million in the three months ended December 31, 2022. Segment income increased $43.2 million, or 25%, to $216.1 million in the three months ended December 31, 2023 compared
to $172.9 million in the three months ended December 31, 2022.
38
Commercial
We offer our commercial clients a comprehensive array of products and services, including risk management and hedging services, execution and clearing exchange-traded and OTC products, voice brokerage, market intelligence and physical trading, as well as commodity financing and logistics services. We believe providing these high-value-added products and services differentiates us from our competitors and maximizes our opportunity to retain our clients.
The
tables below present the financial performance, a disaggregation of operating revenues, and select operating data and metrics used by management in evaluating the performance of the Commercial segment, for the periods indicated.
Three Months Ended December 31,
(in millions)
2023
2022
%
Change
Revenues:
Sales of physical commodities
$
18,809.5
$
12,149.4
55%
Principal gains, net
77.1
69.7
11%
Commission
and clearing fees
44.3
38.8
14%
Consulting, management and account fees
5.8
6.5
(11)%
Interest income
41.3
29.1
42%
Total
revenues
18,978.0
12,293.5
54%
Cost of sales of physical commodities
18,779.6
12,111.1
55%
Operating revenues
198.4
182.4
9%
Transaction-based
clearing expenses
15.8
13.2
20%
Introducing broker commissions
10.4
7.5
39%
Interest expense
8.8
9.0
(2)%
Net
operating revenues
163.4
152.7
7%
Variable direct compensation and benefits
37.0
37.0
—%
Net contribution
126.4
115.7
9%
Fixed
compensation and benefits
15.5
13.7
13%
Other fixed expenses
23.8
18.7
27%
Bad debts (recoveries), net
(0.1)
0.5
n/m
Non-variable
direct expenses
39.2
32.9
19%
Segment income
87.2
82.8
5%
Allocation of overhead costs (1)
8.8
—
n/m
Segment
income, less allocation of overhead costs
$
78.4
$
82.8
n/m
(1)
Includes an allocation of certain overhead costs to our operating segments as noted above for the three months ended December
31, 2023. These allocations will be provided on an ongoing basis, but they have not been calculated for previously reported periods.
Give-up
fee revenues, related to contract execution for clients of other FCMs, as well as cash and voice brokerage revenues are excluded from the calculation of listed derivatives, average rate per contract.
Operating
revenues increased $16.0 million, or 9%, to $198.4 million in the three months ended December 31, 2023 compared to $182.4 million in the three months ended December 31, 2022. Net operating revenues increased $10.7 million, or 7%, to $163.4 million in the three months ended December 31, 2023 compared to $152.7 million in the three months ended December 31, 2022.
Operating revenues derived from listed derivatives increased $5.6 million, or 10%, to $59.4 million in the three months ended December 31, 2023 compared to $53.8 million in the three months ended December 31, 2022. This increase was principally due to a 21% increase in overall
listed derivatives contract volumes, primarily in agricultural and base metal commodity markets, compared to the prior year period. This increase was partially offset by an 11% decline in the average rate per contract compared to the three months ended December 31, 2022.
Operating revenues derived from OTC derivatives increased $2.0 million, or 5%, to $44.5 million in the three months ended December 31, 2023 compared to $42.5 million in the three months ended December 31, 2022. This increase was principally due to a 14% increase in OTC derivative volumes compared to the three months ended December
31, 2022, primarily in agricultural markets. This increase was partially offset by a 9% decline in the average rate per contract compared to the three months ended December 31, 2022.
Operating revenues derived from physical contracts declined $3.1 million, or 6%, to $50.6 million in the three months ended December 31, 2023 compared to $53.7 million in the three months ended December 31, 2022. This decrease was principally due to a $3.7 million decline in activity in our physical agricultural and energy business.
Interest and fee income earned on client
balances increased $11.1 million, or 43%, to $37.2 million in the three months ended December 31, 2023 compared to $26.1 million in the three months ended December 31, 2022 as a result of a significant increase in short-term interest rates, which was partially offset by a 20% decline in average client equity to $1,700 million in the three months ended December 31, 2023.
Variable expenses, excluding interest, expressed as a percentage of operating revenues were 32% in both the three months ended December 31, 2023 and 2022.
Segment income increased $4.4 million, or 5%, to $87.2 million in the three months ended December
31, 2023 compared to $82.8 million in the three months ended December 31, 2022, principally due to the growth in operating revenues, which was partially offset by a $6.3 million increase in non-variable direct expenses. The increase in non-variable direct expenses was principally driven by a $1.8 million increase in fixed compensation and benefits, a $1.4 million increase in professional fees, a $0.8 million increase in travel and business development and a $0.6 million increase in depreciation and amortization compared to the three months ended December 31, 2022.
For the three months ended December 31, 2023, we have calculated an allocation for overhead costs of $8.8 million for the Commercial segment as described in the introduction to Total Segment
Results above. An allocation of overhead costs will be provided on an ongoing basis. We have not calculated historical comparable information.
40
Institutional
We provide institutional clients with a complete suite of equity trading services to help them find liquidity with best execution, consistent liquidity across a robust array of fixed income products, 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.
In addition, we originate, structure and place debt instruments in the international and domestic capital markets. These instruments include asset-backed securities (primarily in Argentina) and domestic municipal securities.
The tables below present the financial performance, a disaggregation of operating revenues, and select operating data and metrics used by management in evaluating the performance of the Institutional segment, for the periods indicated.
Three Months Ended December 31,
(in
millions)
2023
2022
% Change
Revenues:
Sales of physical commodities
$
—
$
—
—%
Principal gains, net
103.2
101.2
2%
Commission
and clearing fees
73.3
67.5
9%
Consulting, management and account fees
17.3
16.8
3%
Interest income
241.9
158.0
53%
Total
revenues
435.7
343.5
27%
Cost of sales of physical commodities
—
—
—%
Operating revenues
435.7
343.5
27%
Transaction-based
clearing expenses
52.9
47.0
13%
Introducing broker commissions
7.7
8.6
(10)%
Interest expense
226.5
144.7
57%
Net
operating revenues
148.6
143.2
4%
Variable direct compensation and benefits
48.4
48.6
—%
Net contribution
100.2
94.6
6%
Fixed
compensation and benefits
16.4
12.7
29%
Other fixed expenses
19.0
20.0
(5)%
Bad debts (recoveries), net
(0.4)
(0.1)
300%
Non-variable
direct expenses
35.0
32.6
7%
Segment income
65.2
62.0
5%
Allocation of overhead costs (1)
12.8
—
n/m
Segment
income, less allocation of overhead costs
$
52.4
$
62.0
n/m
(1)
Includes an allocation of certain overhead costs to our operating segments as noted above for the three months ended December
31, 2023. These allocations will be provided on an ongoing basis, but they have not been calculated for previously reported periods.
Give-up fee revenues, related to contract execution for clients of other FCMs, are excluded from the calculation of listed derivatives,
average rate per contract.
(2)
Interest expense associated with our fixed income activities is deducted from operating revenues in the calculation of Securities RPM, while interest income related to securities lending is excluded.
Operating revenues increased $92.2 million, or 27%, to $435.7 million in the three months ended December 31, 2023 compared to $343.5
million in the three months ended December 31, 2022. Net operating revenues increased $5.4 million, or 4%, to $148.6 million in the three months ended December 31, 2023 compared to $143.2 million in the three months ended December 31, 2022.
Operating revenues derived from listed derivatives increased $3.8 million, or 8%, to $49.8 million in the three months ended December 31, 2023 compared to $46.0 million in the three months ended December 31, 2022, principally due to a 28% increase in listed derivative contract volumes, partially offset by a 12% decline in the average rate per contract.
Operating
revenues derived from securities transactions increased $80.6 million, or 38%, to $293.6 million in the three months ended December 31, 2023 compared to $213.0 million in the three months ended December 31, 2022. The ADV of securities traded increased 47%, principally driven by increased client activity in both equity and fixed income markets. Carried interest on fixed income securities is a component of operating revenues, however interest expense associated with financing these positions is not. As a result, interest expense associated with our fixed income activities is deducted from operating revenues in the calculation of securities RPM in the table above. The securities RPM decreased 30% in the three months ended December 31, 2023 compared to the three months ended December
31, 2022, principally due to a tightening of spreads and a change in product mix.
Operating revenues derived from FX contracts declined $1.2 million, or 13%, to $8.0 million in the three months ended December 31, 2023 compared to $9.2 million in the three months ended December 31, 2022, principally due to an 18% decline in the ADV of FX contracts, partially offset by a 13% increase in the FX contract RPM.
Interest and fee income earned on client balances, which is associated with our listed derivative and correspondent
clearing businesses increased $1.2 million, to $60.5 million in the three months ended December 31, 2023, with an increase in short-term interest rates more than offsetting 27% and 31% declines in average client equity and average money market / FDIC sweep client balances, respectively, compared to the three months ended December 31, 2022.
As a result of the increase in short-term interest rates and the increase in ADV, interest expense increased $81.8 million, to $226.5 million in the three months ended December 31, 2023 compared to $144.7 million in the three months ended December 31, 2022, with interest expense directly associated with serving as an institutional dealer in fixed income securities increasing $75.8 million. Interest
paid to clients decreased $1.4 million, and interest expense directly attributable to securities lending activities increased $6.7 million compared to the three months ended December 31, 2022.
42
Variable expenses, excluding interest, expressed as a percentage of operating revenues declined to 25% in the three months ended December 31, 2023 compared to 30% in the three months ended December 31, 2022, primarily as the result of the increase in interest income.
Segment income increased $3.2 million, or 5%, to $65.2 million in the three months ended December
31, 2023 compared to $62.0 million in the three months ended December 31, 2022, principally due to the increase in net operating revenues noted above, which was partially offset by a $2.4 million increase in non-variable direct expenses, including a $3.7 million increase in fixed compensation and benefits, which was partially offset by a $1.1 million decline in professional fees compared to the three months ended December 31, 2022.
For the three months ended December 31, 2023, we have calculated an allocation for overhead costs of $12.8 million for the Institutional segment as described in the introduction to Total Segment Results above. An allocation of overhead costs will be provided
on an ongoing basis. We have not calculated historical comparable information.
Retail
We provide our retail clients around the world access to over 18,000 global financial markets, including spot foreign exchange ("forex"), both financial trading and physical investment in precious metals, as well as contracts for difference (“CFDs”), which are investment products with returns linked to the performance of underlying assets. In addition, our independent wealth management business offers a comprehensive product suite to retail investors in the U.S.
The tables below present the financial performance, a disaggregation of
operating revenues, and select operating data and metrics used by management in evaluating the performance of the Retail segment, for the periods indicated.
Three Months Ended December 31,
(in millions)
2023
2022
% Change
Revenues:
Sales
of physical commodities
$
11.4
$
254.0
(96)%
Principal gains, net
55.6
31.8
75%
Commission and clearing fees
11.2
10.7
5%
Consulting,
management and account fees
14.1
14.9
(5)%
Interest income
9.4
4.8
96%
Total revenues
101.7
316.2
(68)%
Cost
of sales of physical commodities
9.2
245.7
(96)%
Operating revenues
92.5
70.5
31%
Transaction-based clearing expenses
3.5
5.3
(34)%
Introducing
broker commissions
20.4
20.2
1%
Interest expense
1.6
1.1
45%
Net operating revenues
67.0
43.9
53%
Variable
direct compensation and benefits
4.4
4.7
(6)%
Net contribution
62.6
39.2
60%
Fixed compensation and benefits
10.3
13.2
(22)%
Other
fixed expenses
23.5
29.9
(21)%
Bad debts, net of recoveries
0.1
0.3
(67)%
Non-variable direct expenses
33.9
43.4
(22)%
Segment
income (loss)
28.7
(4.2)
n/m
Allocation of overhead costs (1)
11.5
—
n/m
Segment income (loss), less allocation of overhead costs
$
17.2
$
(4.2)
n/m
(1)
Includes
an allocation of certain overhead costs to our operating segments as noted above for the three months ended December 31, 2023. These allocations will be provided on an ongoing basis, but they have not been calculated for previously reported periods.
Operating revenues increased $22.0 million, or 31%, to $92.5 million in the three months ended December 31, 2023 compared to $70.5 million in the three months ended December 31, 2022. Net operating revenues increased $23.1 million, or 53%, to $67.0 million in the three months ended December 31, 2023 compared to $43.9 million in the three months ended December 31, 2022.
Operating revenues derived from FX/CFD contracts
increased $27.0 million, or 68%, to $66.6 million in the three months ended December 31, 2023 compared to $39.6 million in the three months ended December 31, 2022 principally due to an 84% increase in FX/CFD contracts RPM, which was partially offset by a 13% decline in FX/CFD contracts ADV compared to the three months ended December 31, 2022.
Operating revenues derived from securities transactions, which relate to our independent wealth management activities, increased $1.5 million to $22.6 million in the three months ended December 31, 2023 compared
to $21.1 million in the three months ended December 31, 2022.
Operating revenues derived from physical contracts declined $5.2 million, or 87% to $0.8 million in the three months ended December 31, 2023 compared to $6.0 million in the three months ended December 31, 2022.
Interest and fee income earned on client balances was $0.7 million in the three months ended December 31, 2023 compared to $0.8 million in the three months ended December 31, 2022.
Variable expenses, excluding interest, as a percentage
of operating revenues were 31% in the three months ended December 31, 2023 compared to 43% in the three months ended December 31, 2022, principally due to the increase in operating revenues derived from FX / CFD contracts which typically incur a lower relative percentage of variable expenses than do our other business lines.
Segment income increased $32.9 million to segment income of $28.7 million in the three months ended December 31, 2023 compared to a segment loss of $4.2 million in the three months ended December 31, 2022, principally due to the increase in net operating revenues noted above as well as a $9.5 million decline in non-variable
direct expenses compared to the three months ended December 31, 2022. The decline in non-variable direct expenses was primarily a result of a $2.9 million decline in fixed compensation and benefits, a $2.3 million decline in selling and marketing and a $2.7 million decline in depreciation and amortization compared to the three months ended December 31, 2022.
For the three months ended December 31, 2023, we have calculated an allocation for overhead costs of $11.5 million for the Retail segment as described in the introduction to Total Segment Results above. An allocation of overhead costs will be provided on an ongoing basis, but we have not calculated historical comparable information.
44
Payments
We
provide customized foreign exchange and treasury services to banks and commercial businesses, charities, non-governmental organizations, as well as government organizations. We provide transparent pricing and offer payments services in more than 180 countries and 140 currencies, which we believe is more than any other payments solutions provider.
The tables below present the financial performance, a disaggregation of operating revenues, and select operating data and metrics used by management in evaluating the performance of the Payments segment for the periods indicated.
Three
Months Ended December 31,
(in millions)
2023
2022
% Change
Revenues:
Sales of physical commodities
$
—
$
—
—%
Principal
gains, net
57.5
52.6
9%
Commission and clearing fees
1.5
1.6
(6)%
Consulting, management, account fees
0.9
1.0
(10)%
Interest
income
0.7
0.2
250%
Total revenues
60.6
55.4
9%
Cost of sales of physical commodities
—
—
—%
Operating
revenues
60.6
55.4
9%
Transaction-based clearing expenses
1.8
1.6
13%
Introducing broker commissions
0.6
0.5
20%
Interest
expense
—
—
—%
Net operating revenues
58.2
53.3
9%
Variable compensation and benefits
10.6
11.2
(5)%
Net
contribution
47.6
42.1
13%
Fixed compensation and benefits
7.3
5.5
33%
Other fixed expenses
5.2
4.3
21%
Bad
debts
0.1
—
n/m
Total non-variable direct expenses
12.6
9.8
29%
Segment income
35.0
32.3
8%
Allocation
of overhead costs (1)
5.1
—
n/m
Segment income, less allocation of overhead costs
$
29.9
$
32.3
n/m
(1)
Includes
an allocation of certain overhead costs to our operating segments as noted above for the three months ended December 31, 2023. These allocations will be provided on an ongoing basis, but they have not been calculated for previously reported periods.
Three Months Ended December 31,
(in
millions)
2023
2022
% Change
Operating revenues (in millions):
Payments
$
59.4
$
54.2
10%
Other
1.2
1.2
—%
$
60.6
$
55.4
9%
Select
data (all $ amounts are U.S. dollar or U.S. dollar equivalents):
Operating revenues increased $5.2 million, or 9%, to $60.6 million in the three months ended December 31, 2023 compared to $55.4 million in the three months ended December 31, 2022. Net operating revenues increased $4.9 million, or 9%, to $58.2 million in the three months ended December 31, 2023 compared to $53.3 million in the three months ended December 31, 2022.
The increase in operating revenues was principally due to a 10% increase in the RPM, primarily as a result of an increase in capital transactions from our financial institution clients, while the average daily notional
payment volume was flat compared to the three months ended December 31, 2022.
Variable expenses, excluding interest, expressed as a percentage of operating revenues were 21% in the three months ended December 31, 2023 compared to 24% in the three months ended December 31, 2022, principally driven by a decline in variable compensation and benefits.
45
Segment income increased $2.7 million, or 8%, to $35.0 million in the three months ended December 31, 2023 compared to $32.3 million in the three months ended December
31, 2022. This increase was primarily as result of the increase in net operating revenues noted above, which was partially offset by a $2.8 million increase in non-variable direct expenses. The increase in non-variable direct expenses was primarily driven by a $1.8 million increase in fixed compensation and benefits and a $0.5 million increase in depreciation and amortization compared to the three months ended December 31, 2022.
For the three months ended December 31, 2023, we have calculated an allocation for overhead costs of $5.1 million for the Payments segment as described in the introduction to Total Segment Results above. An allocation of overhead costs will be provided on an ongoing basis. We have not calculated historical
comparable information.
Overhead Costs and Expenses
We incur overhead costs and expenses, including certain shared services such as information technology, accounting and treasury, credit and risk, legal and compliance, and human resources and other activities. The following table provides information regarding overhead costs and expenses.
In addition, for the three months ended December 31, 2023, the table provides information regarding the allocation of a portion of these costs to the aforementioned operating segments. The allocation of overhead costs to operating segments includes costs associated with compliance, technology, and credit and risk costs. The share of
allocated costs is based on resources consumed by the relevant businesses. In addition, the allocation of human resources and occupancy costs is principally based on employee costs within the relevant businesses.
Three Months Ended December 31,
(in millions)
2023
2022
% Change
Compensation
and benefits:
Variable compensation and benefits
$
19.4
$
15.5
25%
Fixed compensation and benefits
40.6
29.9
36%
60.0
45.4
32%
Other
expenses:
Occupancy and equipment rental
7.3
8.8
(17)%
Non-trading technology and support
13.0
9.6
35%
Professional fees
7.5
7.8
(4)%
Depreciation
and amortization
5.5
5.7
(4)%
Communications
1.6
1.6
—%
Selling and marketing
1.3
0.9
44%
Trading
systems and market information
1.7
2.1
(19)%
Travel and business development
1.7
1.6
6%
Other
5.2
6.2
(16)%
44.8
44.3
1%
Overhead
costs and expenses
104.8
89.7
17%
Allocation of overhead costs (1)
(38.2)
—
n/m
Overhead costs and expense, net of allocation to operating segments
$
66.6
$
89.7
n/m
(1)
Includes
an allocation of certain overhead costs to our operating segments as noted above for the three months ended December 31, 2023. The allocations will be provided on an ongoing basis, but they have not been calculated for previously reported periods.
On a gross basis, overhead costs and other expenses increased $15.1 million, or 17%, to $104.8 million in the three months ended December 31, 2023 compared to $89.7 million in the three months ended
December 31, 2022. Compensation and benefits increased $14.6 million, or 32%, to $60.0 million in the three months ended December 31, 2023 compared to $45.4 million in the three months ended December 31, 2022.
The increase in variable and non-variable compensation was partially related to the move of certain client engagement teams out of discrete business lines and into shared services, resulting in increased compensation expense in overhead, and lower compensation expense in the discrete business lines, which were offset with a non-variable charge. Additionally, the increase in non-variable compensation was partially a result of hiring among our compliance and IT departments, principally due to company growth. Average administrative headcount increased 21% in the three months
ended December 31, 2023 compared to the three months ended December 31, 2022.
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Gross other non-compensation expenses increased modestly to $44.8 million in the three months ended December 31, 2023. Most notably, occupancy and equipment rental costs were lower principally due to a partial refund of property tax and related expenses covering prior years in London, while non-trading technology maintenance and support, for the various systems used by the support services departments increased.
Liquidity,
Financial Condition and Capital Resources
Overview
Liquidity is our ability to generate sufficient funding to meet all of our cash needs. Liquidity is of critical importance to us and imperative to maintaining our operations on a daily basis. Senior management establishes liquidity and capital policies, which we monitor and review for funding from both internal and external sources. We continuously evaluate how effectively our policies support our business operations, issuing debt and equity securities, and accessing committed credit facilities. We plan to finance our future operating liquidity and regulatory capital needs in a manner consistent with our past practice. Liquidity and capital matters are reported regularly to our Board of Directors.
Regulatory
StoneX
Financial Inc. is registered as a broker-dealer with the Securities and Exchange Commission (“SEC”) and is a member of both the Financial Industry Regulatory Authority (“FINRA”) and the Municipal 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 the U.S. and abroad. StoneX Financial Inc. has a responsibility to meet margin calls at all exchanges on a daily basis, and even on an intra-day basis, if deemed necessary by relevant regulators or exchanges. We require our clients to make 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 our clients’ net open positions and 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. StoneX Financial Inc. is also subject to the Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (“Customer Protection Rule”).
Gain Capital Group, LLC is registered as both a futures commission merchant and registered foreign exchange dealer, 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 NFA Financial Requirements, Sections 1 and 11.
StoneX Markets LLC is a CFTC registered swap dealer, whose business is overseen by the NFA. The CFTC imposes rules over net capital requirements, as well as the exchange of initial
margin between registered swap dealers and certain counterparties.
These rules specify the minimum amount of capital that must be available to support our clients’ account balances and open trading positions, including the amount of assets that StoneX Financial Inc., Gain Capital Group, LLC and StoneX Markets LLC must maintain in relatively liquid form. Further, the rules are designed to maintain general financial integrity and liquidity.
StoneX Financial Ltd is regulated by the Financial Conduct Authority (“FCA”), the regulator of investment firms in the U.K. as a MiFID investment firm under U.K. law, and is subject to regulations which impose regulatory capital requirements. In Europe, our regulated subsidiaries are subject to E.U. regulation. Across the U.K. and E.U., the respective transpositions
of the Market Abuse Regulation, and the General Data Protection Regulation, also apply. StoneX Financial Ltd is a member of various commodities and futures exchanges in the U.K. and Europe and has the responsibility to meet margin calls at all exchanges on a daily basis and intra-day basis, as necessary. StoneX Financial Ltd is required to be compliant with the U.K.’s ‘MIFIDPRU’ regulation. To comply with these standards, we have implemented daily liquidity procedures, conduct periodic reviews of liquidity by stressed scenarios, and are required to maintain enough liquidity for the firm to survive for one year under the appropriate stressed conditions.
The regulations discussed above limit funds available for dividends to us. As a result, we may be unable to access our operating subsidiaries’ funds when we need them.
StoneX
Financial Pte. Ltd. is regulated by the Monetary Authority of Singapore (“MAS”) and operates as an approved holder of a Capital Market Services and a Payments Service License. StoneX Financial Pte. Ltd. is subject to the requirements of MAS pursuant to the Securities and Futures Act and the Payments Services Act 2019. The regulations include those that govern the treatment of client money and other assets which under certain circumstances must be segregated from the firm’s own assets.
In our physical commodities trading, commercial hedging OTC, securities and foreign exchange trading activities, we may be required 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 determine whether 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.
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As of December 31, 2023, we had total equity of $1,482.8 million, outstanding loans under revolving credit facilities and other payables to lenders of $418.5 million, and $342.9 million outstanding on our senior secured notes, net of deferred financing costs.
A substantial portion of our assets are liquid. As of December 31, 2023, approximately 97% of our assets consisted of cash; securities purchased
under agreements to resell; securities borrowed; deposits with and receivables from exchange-clearing organizations, 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 deposit financed 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. We are indirectly exposed 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 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 obligated to maintain initial margin requirements at the level set by the respective exchanges, but we have the
ability to increase margin requirements for clients based on their open positions, trading activity, or market conditions.
As it relates to 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 related required payments from our clients. OTC clients are required to post sufficient collateral to meet margin requirements based on value-at-risk models, as well as variation margin requirements based on the price movement of the commodity or security in which they transact. Our clients are required to make any 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. In this business as well, 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 to us when due. We would then be exposed to the risk that the settlement of a transaction which is due a client will not be collected from the respective counterparty with which the transaction was offset. We continuously monitor the credit quality of our respective counterparties and mark our positions held with each counterparty to market 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 collateral is valued daily and we may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.
Primary Sources and Uses of Cash
Our cash and cash equivalents and client cash and securities held for clients are held at banks, deposits at liquidity providers,
investments in money market funds that invest in highly liquid investment grade securities including U.S. treasury bills, as well as investments in U.S. treasury bills. In general, we believe all of our investments and deposits are of high credit quality and we have more than adequate liquidity to conduct our businesses.
Our assets and liabilities may vary significantly from period to period due to changing client requirements, economic and market conditions, and our growth. Our total assets as of December 31, 2023 and September 30, 2023, were $23.2 billion and $21.9 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. and StoneX 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.
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The majority of the assets of StoneX Financial Inc., StoneX Financial Ltd, StoneX Financial Pte. Ltd, StoneX Markets LLC, and Gain Capital Group, LLC are restricted from being transferred to us or other affiliates due to specific regulatory requirements. This restriction has no current impact on our ability to meet our cash obligations, and no such impact is expected in the future.
We
have liquidity and funding policies and processes in place that are intended to maintain sufficient flexibility to address both company-specific and industry liquidity needs. The majority of our excess funds is 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.
We do not intend to distribute earnings of our foreign subsidiaries in a taxable manner, and therefore intend to limit distributions to earnings previously taxed in the U.S., or earnings that would qualify for the 100 percent dividends received deduction, and earnings that would not result in any significant foreign taxes. We repatriated $28.0 million and $11.4 million for the three months ended December
31, 2023 and 2022, respectively, of earnings previously taxed in the U.S., resulting in no significant incremental taxes. Therefore, the Company has not recognized a deferred tax liability on its investment in foreign subsidiaries.
Senior Secured Notes
In June 2020, we issued $350.0 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. The Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior second lien secured basis, by certain subsidiaries
of the Company that guarantee the Company’s senior committed credit facility and certain of its domestic subsidiaries.
The Notes will mature on June 15, 2025. Interest on the Notes accrues at a rate of 8.625% per annum and is payable semiannually in arrears on June 15 and December 15 of each year. We incurred debt issuance costs of $9.5 million in connection with the issuance of the Notes, which are being amortized over the term of the Notes under the effective interest method. We have had the right, since June 15, 2022, to redeem the Notes, in whole or in part, at the
redemption prices set forth in the indenture.
Committed Credit Facilities
As of December 31, 2023, we had five committed bank credit facilities, totaling $1,200.0 million, of which $344.0 million was outstanding. Additional information regarding the committed bank credit facilities can be found in Note 9 of the Condensed Consolidated Financial Statements. The credit facilities include:
•A first-lien senior secured syndicated loan facility principally committed untilApril 21, 2026, under which $500.0 million is available to us for general
working capital requirements and capital expenditures. The maturity date is April 21, 2025 for one lender representing $42.5 million of the facility commitment.
•An unsecured line of credit committed until October 29, 2024, under which $190.0 million is available to our wholly owned subsidiary, StoneX Financial Inc. to provide short-term funding of margin to commodity exchanges as necessary.
•A syndicated borrowing facility committed until July 28, 2024, under which $400.0 million is available to our wholly owned subsidiary, StoneX Commodity Solutions LLC, to finance commodity financing arrangements and commodity repurchase agreements.
•An
unsecured syndicated loan facility committed until October 12, 2024, under which our subsidiary, StoneX Financial Ltd is entitled to borrow up to $100.0 million, subject to certain terms and conditions of the credit agreement. This facility is intended to provide short-term funding of margin to commodity exchanges as necessary.
•An unsecured revolving credit facility committed until September 6, 2024, under which $10.0 million is available to our wholly owned subsidiary, StoneX Financial Pte. Ltd. for general working capital requirements.
Our facility agreements contain certain financial covenants relating to financial measures on a consolidated basis, as well as on a stand-alone basis for certain subsidiaries,
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 December 31, 2023, we and our subsidiaries were in compliance with all of our financial covenants under the outstanding facilities.
In accordance with required disclosure as part of our first-lien senior secured syndicated loan facility, during the trailing twelve months ended December 31, 2023, interest expense directly attributable to trading activities includes $632.5 million in connection
with trading activities conducted as an institutional dealer in fixed income securities, and $46.1 million in connection with securities lending activities.
49
As reflected above, certain of our committed credit facilities are scheduled to expire during the next twelve months following the quarterly period ended December 31, 2023. 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.
Uncommitted Credit Facilities
We have access to certain uncommitted financing agreements that support our
ordinary course securities and commodities inventories. The agreements are subject to certain borrowing terms and conditions. As of December 31, 2023 and September 30, 2023, the Company had $67.1 million and $55.5 million total borrowings outstanding under these uncommitted credit facilities, respectively.
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. Our subsidiaries
are in compliance with all of their capital regulatory requirements as of December 31, 2023. Additional information on our subsidiaries subject to significant net capital and minimum net capital requirements can be found in Note 16 of the Condensed Consolidated Financial Statements.
Our subsidiary, StoneX Markets LLC, is a CFTC registered swap dealer, and under these capital rules is subject to a minimum regulatory capital requirement. StoneX Markets LLC has elected to utilize the “bank-based” approach, as reflected in CFTC Rule 23.101(a)(1)(i) to calculate its capital requirements. Under the “bank-based” approach StoneX Markets LLC must satisfy the following capital requirements: Common Equity Tier 1 (“CET1”) capital of at least $20 million; (ii) CET1 equal to at
least 6.5% of its risk weighted assets (“RWA”); (iii) CET1, Additional Tier 1, and Tier 2 (collectively, total aggregate Bank Holding Company (“BHC”) capital) equal to at least 8% of its RWA; (iv) total aggregate BHC capital equal to 8% of its uncleared swap margin; and (v) the minimum capital required by NFA. Aggregate BHC capital and the related net capital requirement may fluctuate on a daily basis.
Compliance with this or other swap-related regulatory capital requirements may require us to devote more capital to these businesses or otherwise restructure our operations, such as by combining these businesses with other regulated subsidiaries that must also satisfy regulatory capital requirements. StoneX Markets LLC has faced, and may continue to face, increased costs due to the registration and regulatory requirements
listed above, as may any other of our subsidiaries that may be required to register, or may register voluntarily, as a swap dealer and/or swap execution facility.
Cash Flows
We include client cash and securities that meet the short-term requirement for cash classification to be segregated for regulatory purposes in our Condensed Consolidated Statements of Cash Flows. We hold a significant amount of U.S. Treasury obligations, which represent investments 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 Condensed Consolidated Statements of Cash Flows to the extent that they have an original or acquired maturity of 90 days or less and, therefore, meet the definition of a segregated cash equivalent. Purchases and sales of U.S. Treasury securities representing investment of clients’ funds and U.S. Treasury securities pledged or redeemed by particular clients in lieu of cash margin are presented as operating uses and sources of cash, respectively, within the operating section of the consolidated statements of cash flows if they have an original or acquired maturity of greater than 90 days. Typically, there is an offsetting use or source of cash related to the change in the payables to clients. However, we will report a use of cash in periods where segregated U.S. Treasury securities that meet the aforementioned definition of a segregated cash equivalent
mature and are replaced with U.S. Treasury securities that have original or acquired maturities that are greater than 90 days.
Our cash, segregated cash, cash equivalents, and segregated cash equivalents increased by $223.4 million from $6,041.7 million as of September 30, 2023 to $6,265.1 million as of December 31, 2023. During the three months ended December 31, 2023, net cash of $152.4 million was provided by operating activities, $12.7 million was used in investing activities and net cash of $76.9 million was provided by financing activities.
Net cash provided by financing activities during the three months ended December 31, 2023 included significant inflows from payables to lenders
under 90 days of $77.5 million, outflows for tax related withholdings, and we received $0.5 million related to employee stock option exercises.
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 guaranty 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,
50
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.
Unrealized gains and losses on open positions revalued at prevailing foreign currency exchange rates are included in trading revenue but have no direct impact on cash flow from operations. Similarly, gains and losses become realized when client transactions are liquidated, though they do not affect cash flow. To some extent, the amount of net deposits made by our clients in any given period is influenced by the impact of gains and losses on our client balances, such that clients may be required to post additional funds to maintain open positions or may
choose to withdraw excess funds on open positions.
We continuously evaluate opportunities to expand our business. Investing activities included $12.7 million in capital expenditures for property and equipment during the three months ended December 31, 2023 compared to $11.3 million during the prior year.
Fluctuations in exchange rates increased our cash, segregated cash, cash equivalents and segregated cash equivalents by $6.8 million.
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.
Commitments
Information about our commitments and contingent liabilities is contained in Note 11 of the Condensed Consolidated Financial Statements.
Off Balance Sheet Arrangements
We are party to certain financial instruments with off-balance sheet risk in the normal course of business as a registered securities broker-dealer, futures commission merchant, U.K. based financial services firm, provisionally registered swap dealer and from our market-making and proprietary trading in the
foreign exchange and commodities and debt securities markets. These financial instruments include futures, forward and foreign exchange contracts, exchange-traded and OTC options, To Be Announced (“TBA”) securities and interest rate swaps. Derivative financial instruments involve varying degrees of off-balance sheet market risk whereby changes in the fair values of underlying financial instruments may result in changes in the fair value of the financial instruments in excess of the amounts reflected in the Condensed Consolidated Balance Sheets. Exposure to market risk is influenced by a number of factors, including the relationships between the financial instruments and our positions, as well as the volatility and liquidity in the markets in which the financial instruments are traded. The principal risk components of financial instruments include, among other things, interest
rate volatility, the duration of the underlying instruments and changes in commodity pricing and foreign exchange rates. We attempt to manage our exposure to market risk through various techniques. Aggregate market limits have been established and market risk measures are routinely monitored against these limits. Derivative contracts are traded along with cash transactions because of the integrated nature of the markets for such products. We manage the risks associated with derivatives on an aggregate basis along with the risks associated with our proprietary trading and market-making activities in cash instruments as part of our firm-wide risk management policies.
A significant portion of these instruments are primarily the execution of orders for commodity futures and options on futures contracts
on behalf of our clients, substantially all of which are transacted on a margin basis. Such transactions may expose us to significant credit risk in the event margin requirements are not sufficient to fully cover losses which clients may incur. We control the risks associated with these transactions by requiring clients to maintain margin deposits in compliance with both clearing organization requirements and internal guidelines. We monitor required margin levels daily and, therefore, may require clients to deposit additional collateral or reduce positions when necessary. We also establish contract limits for clients, which are monitored daily. We evaluate each client’s creditworthiness on a case-by-case basis. Clearing, financing, and settlement activities may require us to maintain funds with or pledge securities as collateral with other financial institutions. Generally, these
exposures to exchanges are subject to netting of open positions and collateral, while exposures to clients are subject to netting, per the terms of the client agreements, which reduce the exposure to us by permitting receivables and payables with such clients to be offset in the event of a client default. Management believes that the margin deposits held as of December 31, 2023 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.
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As
a broker-dealer in U.S. Treasury obligations, U.S. government agency obligations, agency mortgage-backed obligations, and asset-backed obligations, we are engaged in various securities trading, borrowing and lending activities serving solely institutional counterparties. Our exposure to credit risk associated with the nonperformance of counterparties in fulfilling their contractual obligations pursuant to these securities transactions and market risk associated with the sale of securities not yet purchased can be directly impacted by volatile trading markets which may impair their ability to satisfy outstanding obligations to us. In the event of non-performance and unfavorable market price movements, we may be required to purchase or sell financial instruments, which may result in a loss to us.
We transact OTC and foreign exchange contracts
with our clients, and our OTC and foreign exchange trade desks will generally offset the client’s transaction simultaneously with one of our trading counterparties or will offset that transaction with a similar, but not identical, position on the exchange. These unmatched transactions are intended to be short-term in nature and are conducted to facilitate the most effective transaction for our client.
Additionally, we hold options and futures on options contracts resulting from market-making and proprietary trading activities in these product lines. We assist clients in our commodities trading business to protect the value of their future production (precious or base metals) by selling them put options on an OTC basis. We also provide our physical commodities trading business clients with sophisticated option products, including combinations of
buying and selling puts and calls. We mitigate our risk by effecting offsetting options with market counterparties or through the purchase or sale of exchange-traded commodities futures. The risk mitigation of offsetting options is not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC.
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 of December 31, 2023 and September 30, 2023, at fair value of the related financial instruments, totaling
$2,748.0 million and $3,085.6 million, respectively. These positions are held to offset the risks related to financial assets owned, and reported in our Condensed Consolidated Balance Sheets in Financial instruments owned, at fair value and Physical commodities inventory, net. We will incur losses if the fair value of the financial instruments sold, not yet purchased, increases subsequent to December 31, 2023, which might be partially or wholly offset by gains in the value of assets held as of December 31, 2023. The totals of $2,748.0 million and $3,085.6 million include a net liability of $245.5 million and $288.3 million for derivative contracts, including those designated as hedges, based
on their fair value as of December 31, 2023 and September 30, 2023, 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 guaranties 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 guaranty obligations would arise only if the exchange had previously exhausted its resources. In addition, any such guaranty obligation would be apportioned among the other non-defaulting members of the exchange. Our liability under these arrangements is not quantifiable and could exceed the cash and securities we have posted as collateral at the exchanges. However, management believes that the potential for us to be required to make payments
under these arrangements is remote. Accordingly, no contingent liability for these arrangements has been recorded in the Condensed Consolidated Balance Sheets as of December 31, 2023 and September 30, 2023.
Effects of Inflation
Increases in our expenses, such as compensation and benefits, transaction-based clearing expenses, occupancy and equipment rental, may result from inflation, while we 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.
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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.
Other Accounting Policies
Note 1 to the Consolidated Financial Statements included within the most recent Annual Report filed on Form 10-K includes our significant accounting policies. There have been no material changes to these
policies.
Accounting Development Updates
Recently Issued Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”). ASU 2021-08 requires an acquirer in a business combination to recognize and measure
contract assets and contract liabilities from acquired contracts using the revenue recognition guidance under Accounting Standards Codification Topic 606, Revenue from Contacts with Customers, in order to recognize contract liabilities in alignment with the definition of performance obligations. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, which means that it will be effective for our fiscal year beginning October 1, 2023. Early
adoption is permitted. We do not believe that adoption of ASU 2021-08 will have a significant impact on our financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which will require the Company to disclose specified additional information in its income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 will also require the Company to disaggregate its income taxes paid disclosure by federal, state and foreign taxes, with further disaggregation required for significant individual jurisdictions. ASU 2023-09 is effective for the
Company’s fiscal year ending September 30, 2026. Early adoption is permitted. The guidance allows for adoption using either a prospective or retrospective transition method. We are currently evaluating the impact that adopting this guidance will have on our disclosures.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which will require the Company to disclose segment expenses that are significant and regularly provided to the Company’s chief operating decision maker (“CODM”). In addition, ASU 2023-07 will require the
Company to disclose the title and position of its CODM and how the CODM uses segment profit or loss information in assessing segment performance and deciding how to allocate resources. ASU 2023-09 is effective for the Company’s fiscal year ending September 30, 2026. Early adoption is permitted. The guidance should be applied retrospectively unless impracticable. We are currently evaluating the impact that adopting this guidance will have on our disclosures.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Credit Risk
See also Note 4 to the condensed consolidated financial
statements, “Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk”.
Market Risk
We conduct our market-making and trading activities predominantly as a principal, which subjects our capital to significant risks. These risks include, but are not limited to, absolute and relative price movements, price volatility and changes in liquidity, over which we have virtually no control. Our exposure to market risk varies in accordance with the volume of client-driven market-making transactions, the size of the proprietary positions and the volatility of the financial instruments traded.
We seek to mitigate exposure to market risk by utilizing a variety of qualitative and quantitative techniques:
•Diversification of business activities and instruments;
•Limitations
on positions;
•Allocation of capital and limits based on estimated weighted risks; and
•Daily monitoring of positions and mark-to-market profitability.
We utilize derivative products in a trading capacity as a dealer to satisfy client needs and mitigate risk. We manage risks from both derivatives and non-derivative cash instruments on a consolidated basis. The risks of derivatives should not be viewed in isolation, but in aggregate with our other trading activities.
We are exposed to market risk in connection with our retail trading activities. Because we act as counterparty to our retail clients’ transactions, we are exposed to risk on each trade that the value of our position will decline. Accordingly, accurate and
53
efficient
management of our net exposure is a high priority, and we have developed policies addressing both our automated and manual procedures to manage our exposure. These risk-management policies and procedures are established and reviewed regularly by the Risk Committee of our Board of Directors. Our risk-management policies require quantitative analyses by instrument, as well as assessment of a range of market inputs, including trade size, dealing rate, client margin and market liquidity. Our risk-management procedures require our team of senior traders to monitor risk exposure on a continuous basis and update senior management both informally over the course of the trading day and formally through intraday and end of day reporting. A key component of our approach to managing market risk is that we do not initiate market positions for our own account in anticipation of future movements in the relative prices of products we offer.
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 three months ended December 31, 2023.
In our Securities market-making and trading activities, we maintain inventories of equity and debt securities. In our Commercial segment, our positions include physical commodities inventories, precious metals on lease, forwards, futures and options on futures, and OTC derivatives. Our commodity trading activities are managed as one consolidated book for each commodity encompassing both cash positions and derivative instruments. We monitor the aggregate position for each
commodity in equivalent physical ounces, metric tons, or other relevant unit.
Interest Rate Risk
In the ordinary course of our operations, we have interest rate risk from the possibility that changes in interest rates will affect the values of financial instruments and impact interest income earned. Within our domestic institutional dealer in fixed income securities business, we maintain a significant amount of trading assets and liabilities which are sensitive to changes in interest rates. These trading activities primarily consist of securities trading in connection with U.S. Treasury, U.S. government agency, agency mortgage-backed and agency asset-backed obligations, as well as investment grade, high-yield, convertible and emerging markets debt securities. Derivative instruments, which consist of futures, TBA securities and forward settling
54
transactions,
are used to manage risk exposures in the trading inventory. We enter into TBA securities transactions for the sole purpose of managing risk associated with mortgage-backed securities.
In addition, we generate interest income from the positive spread earned on client deposits. We typically invest in U.S. Treasury bills, notes, and obligations issued by government sponsored entities, reverse repurchase agreements involving U.S. Treasury bills and government obligations or AA-rated money market funds. In some instances, we maintain interest earning cash deposits with banks, clearing organizations and counterparties. We have an investment policy which establishes acceptable standards of credit quality and limits the amount of funds that can be invested within a particular fund, institution, clearing organization or counterparty. We estimate that as of December 31, 2023, an immediate
25 basis point decrease in short-term interest rates would result in approximately $3.8 million less in annual net income.
We manage interest expense using a combination of variable and fixed rate debt. The debt instruments are carried at their unpaid principal balance which approximates fair value. As of December 31, 2023, $418.5 million of outstanding principal debt was variable-rate debt. We are subject to earnings and liquidity risks for changes in the interest rate on this debt. As of December 31, 2023, $348.0 million of outstanding principal debt was fixed-rate long-term debt.
Foreign Currency Risk
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of
our earnings and assets. Entities that have assets and liabilities denominated in currencies other than the primary economic environment in which the entity operates are subject to remeasurement. Principally, all sales are denominated in the currency of the subsidiary, while related operating costs are denominated in the currency of the local country and translated into USD for consolidated reporting purposes. Although the majority of the assets and liabilities of these subsidiaries are denominated in the functional currency of the subsidiary, they may also hold assets or liabilities denominated in other currencies. As a result, our results of operations and financial position are exposed to changing currency rates. We have executed hedging transactions in relation to certain currencies to mitigate our exposure to volatility in those certain foreign currency exchange rates. From
time-to-time, we may consider entering into larger hedges in those certain contracts or hedging transactions in additional currencies to mitigate our exposure to more foreign currency exchange rates. These hedging transactions may not be successful.
Item 4. Controls and Procedures
In connection with the filing of this Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31,
2023. Our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that their objectives were met as of December 31, 2023.
There are limitations inherent in any internal control, such as the possibility of human error and the circumvention or overriding of controls. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met, and may not prevent or detect misstatements. As conditions change over time, so too may the effectiveness of internal controls. As a result, there can be no assurance that a control system will succeed in preventing all possible instances of error and fraud. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving
their objectives, and the conclusions our Chief Executive Officer and Chief Financial Officer are made at the “reasonable assurance” level.
There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings
For information regarding certain legal proceedings to which we are currently a party, see Note 11,
“Commitments and Contingencies” in the notes to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
In addition to the other information set forth in this report, information regarding risks affecting us appears in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that management currently considers to be non-material may in the future adversely affect our business, financial condition and operating results.
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Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
On August 30, 2023, our Board of Directors authorized the repurchase of up to 1.5 million shares of our outstanding common stock from time to time in open market purchases and private transactions, commencing on October 1, 2023 and ending on September 30, 2024. The repurchases are subject to the discretion of the senior management team to implement our stock repurchase plan, and subject to market conditions and as permitted by securities laws and other legal, regulatory and contractual requirements and covenants.
Our common stock repurchase program activity for the three months ended December 31, 2023 was as follows:
Period
Total
Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Maximum Number of Shares Remaining to be Purchased Under the Program
(1)
The 2022 Omnibus Incentive Compensation Plan allows for “withhold to cover” as a tax payment method for vesting of restricted stock awards. Pursuant to the “withhold to cover” method, we withheld from certain employees shares noted in the table above to cover tax withholding related to the vesting of their awards. For the three months ended December 31, 2023, a total of 15,862 shares were withheld at an average price of $64.53.
Item 5. Other Information
During the three months ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated
a “iRule 10b5-1 trading arrangement” or “iinon-Rule 10b5-1 trading arrangement/,”
as each term is defined in Item 408 of Regulation S-K, except as described below.
i
Name
and Title
Type of Plan
Adoption Date
Duration or End Date
Aggregate Number of Securities to be Sold
Description of Trading Arrangement
iXuong Nguyen - iChief
Operating Officer
iRule 10b5-1 trading arrangement
i12/4/2023
11/29/2024
i60,000
Exercise
of stock options and sale of the underlying shares
iSean O’Connor - iChief Executive Officer
iRule 10b5-1 trading
arrangement
i12/13/2023
12/31/2024
i112,500
Sales
of shares
iPhilip Smith - iChief Executive Officer - EMEA
iRule 10b5-1 trading arrangement
i12/21/2023
11/8/2024
i22,500
Sales
of shares
iDiego Rotsztain - iChief Governance and Legal Officer
iRule 10b5-1 trading arrangement
i12/21/2023
12/31/2024
i5,677
Sales
of shares
/
Disclosure Pursuant to Item 5.02 of Current Report on Form 8-K - Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
On December 5, 2023, Scott J. Branch, a member of the Company’s board of directors, advised the Company that he would not stand for re-election as a director of the Company at the
2024 annual meeting of stockholders of the Company to be held on February 27, 2024 (the “2024 Annual Meeting”). At the conclusion of Mr. Branch’s current term as a director at the 2024 Annual Meeting, he will retire and resign as a director of the Company. Mr. Branch’s decision to not stand for re-election was not the result of any disagreement with the Company or its board of directors or management. Disclosure of Mr. Branch’s decision to not stand for re-election to the board of directors is being made in this Quarterly Report on Form 10-Q in lieu of disclosure under Item 5.02(b) of Form 8-K.
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
Cover
Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*
Filed as part of this report.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.