Throughout this document, unless the context otherwise requires, the terms
"Company", "we", "us" and "our" refer to
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 andU.S. state securities laws, the impact of changes in technology in the securities and commodities trading industries and the potential impact of the coronavirus ("COVID-19") pandemic on our business, operations, results of operations, financial condition, workforce or the operations or decisions of our clients, suppliers or business customers. Although we believe that our forward-looking statements are based upon reasonable assumptions regarding our business and future market conditions, there can be no assurances that our actual results will not differ materially from any results expressed or implied by our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. We caution readers that any forward-looking statements are not guarantees of future performance.
Overview
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 3,800 employees as ofMarch 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 section of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2022 . 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 global payments business. See Segment Information for a listing of business activities performed within our reportable segments.
Executive Summary
In the second quarter of fiscal 2023, we continued to experience strong volume growth across most of our product offerings, however while volatility continued to be heightened in both financial and physical markets, it was significantly diminished compared to the three months endedMarch 31, 2022 . The prior year period reflected the effects of the Russian invasion ofUkraine , which resulted in a significant widening of spreads in many of the key markets in which our clients transact. This has resulted in a lower rate per contract or RPM across our product offerings compared to the prior year, with the exception of Global Payments. We continue to see the effects of the significant increase in short term interest rates, which when combined with growth in client balances, led to strong growth in interest and fee income earned on client balances. Operating revenues increased$159.7 million , or 29%, to$704.4 million in the three months endedMarch 31, 2023 compared to$544.7 million in the three months endedMarch 31, 2022 , led by our Institutional segment, which added$159.7 million compared to the three months endedMarch 31, 2022 . In addition, our Commercial and Global Payments segments added$36.0 million and$8.8 million , respectively, compared to the three months endedMarch 31, 2022 . Operating revenues in our Retail segment declined$41.4 million , compared to the three months endedMarch 31, 2022 . Net operating revenues declined$0.9 million to$399.4 million in the three months endedMarch 31, 2023 compared to$400.3 million in the three months endedMarch 31, 2022 . Net operating revenues in our Retail segment declined$36.0 million , compared to the three months endedMarch 31, 2022 , partially offset by increases in our Commercial segment, which added$29.3 million compared to the three months endedMarch 31, 2022 . In addition, our Global Payments and Institutional segments added$8.5 million and$5.1 million , respectively, compared to the three months endedMarch 31, 2022 . Interest and fee income on client balances increased$93.0 million , or 894%, to$103.4 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 , principally driven by a significant increase in short term interest rates as well as strong growth in our client balances, as the average client equity increased$2.0 billion , or 37%, to$7.2 billion . Average money-market/FDIC sweep balances declined 22% to$1.4 billion in the three months endedMarch 31, 2023 32 -------------------------------------------------------------------------------- compared to the three months endedMarch 31, 2022 . The interest expense attributable to client balances on deposit increased$36.6 million , to$37.2 million in the three months endedMarch 31, 2023 compared to$0.6 million in the three months endedMarch 31, 2022 . Overall segment income decreased$10.1 million , or 5%, to$179.4 million in the three months endedMarch 31, 2023 compared to$189.5 million in the three months endedMarch 31, 2022 . Segment income in our Commercial segment increased$32.8 million compared to the three months endedMarch 31, 2022 , principally as a result of strong growth in interest/fees earned on client balances as well as in operating revenues derived from physical contracts, both in agricultural and energy products as well as in precious metals in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . In addition, non-variable direct expenses declined$1.5 million compared to the three months endedMarch 31, 2022 . Segment income in our Institutional segment increased$5.8 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This growth in segment income was driven by a$159.7 million increase in operating revenues, which was partially offset by a$156.5 million increase in interest expense, of which$117.5 million was related to our activities as an institutional fixed income dealer. Segment income in our Retail segment declined$40.7 million , in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This decline was principally as a result of a 42% decline in operating revenues derived from FX/Contracts for Difference ("CFD") contracts as a result of diminished volatility and tighter trading ranges in our larger volume markets. Non-variable direct expenses increased$2.0 million compared to the three months endedMarch 31, 2022 . In addition, the three months endedMarch 31, 2022 include a$6.4 million foreign exchange antitrust class action settlement received in our Retail forex business. Segment income in our Global Payments segment declined$8.0 million in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This decline was primarily related to a$14.0 million increase in non-variable direct expenses, which was partially offset by an increase in net operating revenues. The increase in non-variable direct expenses was primarily driven by a$12.7 million increase in fixed compensation and benefits, including a$10.0 million severance charge related to a reorganization of the business. This plan will include a decline in variable compensation and benefits as a percentage of operating revenues going forward. Interest expense related to corporate funding purposes increased$4.3 million to$14.9 million in the three months endedMarch 31, 2023 compared to$10.6 million in the three months endedMarch 31, 2022 , principally due to higher short-term interest rates and an increase in average borrowings. On the expense side, we continue to focus on maintaining our variable cost model and limiting the growth of our non-variable expenses. To that end, variable expenses were 51% of total expenses in the three months endedMarch 31, 2023 compared to 55% in the three months endedMarch 31, 2022 . Non-variable expenses, excluding bad debts, increased$34.2 million , period-over-period, principally due to higher fixed compensation and benefits, including a$10.8 million increase in severance costs and$3.1 million million in accelerated share-base compensation relating to departing employees, as well as increases in non-trading technology and support, travel and business development, depreciation and amortization and occupancy and equipment rental. Our net income decreased$22.3 million to$41.7 million in the three months endedMarch 31, 2023 compared to$64.0 million in the three months endedMarch 31, 2022 . Diluted earnings per share were$1.95 for the three months endedMarch 31, 2023 compared to$3.11 in the three months endedMarch 31, 2022 .
Recent Events Affecting the Financial Services Industry
OnJanuary 31, 2023 , we were notified byION Group , a vendor that provides back office trade processing services related to certain of our listed derivatives businesses, that it had experienced a cybersecurity incident, which rendered certain of its services inaccessible to us and its other clients. As a result of the incident, we imposed temporary restrictions on clients of ourUK subsidiary relating to the trading of listed derivatives. DuringFebruary 2023 , these services were restored and the restrictions on clients' activities were lifted. 33 --------------------------------------------------------------------------------
Selected Summary Financial Information
Results of Operations
Our total revenues, as reported, combine gross revenues for the physical commodities business and net revenues for all other businesses. Management believes that operating revenues, which deduct the cost of sales of physical commodities from total revenues, is a more useful financial measure with which to assess our results of operations. The table below sets forth our operating revenues, as well as other key financial measures, for the periods indicated: Financial Information (Unaudited) Three Months Ended March 31, Six Months Ended March 31, (in millions) 2023 2022 % Change 2023 2022 % Change Revenues: Sales of physical commodities$ 15,506.2 $ 15,864.2 (2)%$ 27,909.6 $ 29,783.1 (6)% Principal gains, net 256.6 323.5 (21)% 510.8 574.6 (11)% Commission and clearing fees 130.7 138.4 (6)% 248.7 254.7 (2)% Consulting, management, and account fees 40.7 25.4 60% 80.5 49.5 63% Interest income 226.8 31.2 627% 423.0 62.2 580% Total revenues 16,161.0 16,382.7 (1)% 29,172.6 30,724.1
(5)%
Cost of sales of physical commodities 15,456.6 15,838.0 (2)% 27,813.4 29,728.9 (6)% Operating revenues 704.4 544.7 29% 1,359.2 995.2 37% Transaction-based clearing expenses 69.2 76.5 (10)% 136.5 147.4
(7)%
Introducing broker commissions 42.2 43.2 (2)% 79.0 81.5 (3)% Interest expense 178.7 14.1 1,167% 333.0 29.8 1,017% Interest expense on corporate funding 14.9 10.6 41% 29.3 22.4 31% Net operating revenues 399.4 400.3 -% 781.4 714.1 9% Compensation and benefits 232.5 207.1 12% 431.5 382.1 13% Bad debts, net of recoveries 3.0 12.3 (76)% 3.7 12.1 (69)% Other expenses 106.4 99.9 7% 216.6 186.4 16% Total compensation and other expenses 341.9 319.3 7% 651.8 580.6
12%
Gain on acquisition and other gain - 6.4 (100)% 23.5 6.4 267% Income before tax 57.5 87.4 (34)% 153.1 139.9 9% Income tax expense 15.8 23.4 (32)% 34.8 34.2 2% Net income $ 41.7$ 64.0 (35)%$ 118.3 $ 105.7 12% Balance Sheet information:
March 31, 2023 March 31, 2022 % Change Total assets$ 21,918.9 $ 21,195.7 3% Payables to lenders under loans$ 561.3 $ 471.3
19%
Senior secured borrowings, net$ 340.6 $ 503.5 (32)% Stockholders' equity$ 1,247.3 $ 1,005.6 24% 34
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The tables below display 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 areU.S. dollar or U.S. dollar equivalents Three Months Ended March 31, Six Months Ended March 31, 2023 2022 % Change 2023 2022 % Change Operating Revenues (in millions): Listed derivatives$ 110.5 $ 123.0 (10)% $ 210.3$ 223.6 (6)% Over-the-counter ("OTC") derivatives 57.9 62.4 (7)% 100.4 109.1 (8)% Securities 249.2 151.3 65% 483.3 274.0 76% FX / Contracts For Difference ("CFD") contracts 61.8 98.9 (38)% 110.6 171.1 (35)% Global payments 48.5 40.1 21% 102.7 81.4 26% Physical contracts 54.1 40.7 33% 113.8 81.6 39% Interest / fees earned on client balances 103.4 10.4 894% 189.6 18.7 914% Other 25.6 21.1 21% 52.1 41.1 27% Corporate Unallocated 2.5 1.9 32% 15.3 4.0 283% Eliminations (9.1) (5.1) 78% (18.9) (9.4) 101%$ 704.4 $ 544.7 29%$ 1,359.2 $ 995.2 37% Volumes and Other Select Data (all $ amounts areU.S. dollar orU.S. dollar equivalents): Listed derivatives (contracts, 000's) 41,588 42,033 (1)% 81,787 78,746 4% Listed derivatives, average rate per contract (1)$ 2.54 $ 2.77 (8)% $ 2.42$ 2.70 (10)% Average client equity - listed derivatives (millions)$ 7,222 $ 5,267 37% $ 7,722$ 4,971 55% OTC derivatives (contracts, 000's) 858 738 16% 1,576 1,500 5% OTC derivatives, average rate per contract$ 67.94 $ 84.98 (20)% $ 64.37$ 72.85 (12)% Securities average daily volume ("ADV") (millions)$ 5,759 $ 3,492 65% $ 4,995$ 3,095 61% Securities rate per million ("RPM") (2)$ 282 $ 554 (49)% $ 341$ 543 (37)% Average money market /FDIC sweep client balances (millions)$ 1,374 $ 1,751 (22)% $ 1,455$ 1,663 (13)% FX / CFD contracts ADV (millions)$ 13,490 $ 14,937 (10)%$ 13,160 $ 13,849 (5)% FX / CFD contracts RPM$ 72 $ 104 (31)% $ 67$ 96 (30)% Global Payments ADV (millions)$ 65 $ 56 16% $ 70$ 59 19% Global Payments RPM$ 11,916 $ 11,668 2%$ 11,655 $ 11,118 5%
(1) Give-up fees, 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
Three Months Ended
Operating revenues increased$159.7 million , or 29%, to$704.4 million in the three months endedMarch 31, 2023 compared to$544.7 million in the three months endedMarch 31, 2022 . Operating revenues derived from listed derivatives declined$12.5 million , or 10%, to$110.5 million in the three months endedMarch 31, 2023 compared to$123.0 million in the three months endedMarch 31, 2022 . This decline was principally due to 8% and 1% declines in the average rate per contract and listed derivative contract volumes, respectively, compared to the three months endedMarch 31, 2022 . Operating revenues derived from OTC derivatives declined$4.5 million , or 7%, to$57.9 million in the three months endedMarch 31, 2023 compared to$62.4 million in the three months endedMarch 31, 2022 . This was the result of a 20% decline in average rate per contract, which was partially offset by a 16% increase in OTC derivative contract volumes, compared to the three months endedMarch 31, 2022 . 35 -------------------------------------------------------------------------------- Operating revenues derived from securities transactions increased$97.9 million , or 65%, to$249.2 million in the three months endedMarch 31, 2023 compared to$151.3 million in the three months endedMarch 31, 2022 . This increase was principally due to a 65% 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. As a result of the significant increase in short term rates, we have amended our calculation of Securities RPM, in the table above, to present the RPM after deducting from operating revenues the interest expense associated with our fixed income activities. Net operating revenues derived from securities transactions decreased$19.9 million , or 19%, to$84.2 million in the three months endedMarch 31, 2023 compared to$104.1 million in the three months endedMarch 31, 2022 . This decline was principally due to a 49% decline in RPM principally due to a tightening of spreads realized in equity markets.
Operating revenues derived from FX/CFD contracts declined
Operating revenues from global payments increased$8.4 million , or 21%, to$48.5 million in the three months endedMarch 31, 2023 compared to$40.1 million in the three months endedMarch 31, 2022 , principally driven by a 16% increase in ADV and a 2% increase in global payments RPM. Operating revenues derived from physical contracts increased$13.4 million , or 33%, to$54.1 million in the three months endedMarch 31, 2023 compared to$40.7 million in the three months endedMarch 31, 2022 . This increase was principally due to growth in both our physical agricultural and energy business and physical precious metals business. 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$93.0 million , or 894%, to$103.4 million in the three months endedMarch 31, 2023 compared to$10.4 million in the three months endedMarch 31, 2022 . This was principally driven by a significant increase in short term interest rates as well as a 37% increase in average client equity in listed derivatives.
Six Months Ended
Operating revenues increased$364.0 million , or 37%, to$1,359.2 million in the six months endedMarch 31, 2023 compared to$995.2 million in the six months endedMarch 31, 2022 . The table above displays operating revenues disaggregated across the key products we provide to our clients. Operating revenues from listed derivatives declined$13.3 million , or 6%, to$210.3 million in the six months endedMarch 31, 2023 compared to$223.6 million in the six months endedMarch 31, 2022 , principally driven by a 10% decline in the average rate per contract, which was partially offset by a 4% increase in listed derivative contract volumes. Operating revenues in OTC derivatives declined$8.7 million , or 8%, to$100.4 million in the six months endedMarch 31, 2023 compared to$109.1 million in the six months endedMarch 31, 2022 . This growth was principally driven by a 12% decline in average rate per contract which was partially offset by a 5% increase OTC contract volumes. Operating revenue from securities transactions increased$209.3 million , or 76%, to$483.3 million in the six months endedMarch 31, 2023 compared to$274.0 million in the six months endedMarch 31, 2022 . This increase was principally due to a 61% increase in securities 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. As a result of the significant increase in short term rates, we have amended our calculation of Securities RPM, in the table above, to present the RPM after deducting from operating revenues the interest expense associated with our fixed income activities. Net operating revenues derived from securities transactions increased$1.0 million , or 1%, to$177.6 million in the six months endedMarch 31, 2023 compared to$176.6 million in the three months endedMarch 31, 2022 . This increase was principally driven by the 61% increase in securities ADV, which was mostly offset by a 37% decline in RPM principally due to a tightening of spreads realized in equity markets. Operating revenues from FX/CFD contracts declined$60.5 million , or 35%, to$110.6 million in the six months endedMarch 31, 2023 compared to$171.1 million in the six months endedMarch 31, 2022 , principally as a result of a 30% decline in FX/CFD contracts RPM, as well as a 5% decline in FX/CFD contracts ADV. Operating revenues from global payments increased by$21.3 million , or 26%, to$102.7 million in the six months endedMarch 31, 2023 compared to$81.4 million in the six months endedMarch 31, 2022 , principally as a result of a 19% increase in ADV, as well as a 5% increase in payments RPM. Operating revenues from physical contracts increased$32.2 million , or 39%, to$113.8 million in the six months endedMarch 31, 2023 compared to$81.6 million in the six months endedMarch 31, 2022 , principally due to increased client activity in agricultural and energy commodities, including the acquisition of CDI, effectiveOctober 31, 2022 , as well as continued strong client demand for precious metals. 36 -------------------------------------------------------------------------------- Interest and fee income earned on client balances, which is associated with our listed and OTC derivative businesses, as well as our correspondent clearing and independent wealth management businesses, increased$170.9 million , or 914%, to$189.6 million in the six months endedMarch 31, 2023 compared to$18.7 million in the six months endedMarch 31, 2022 , principally as a result of a significant increase in short term interest rates as well as a 55% increase in average client equity.
Interest and Transactional Expenses
Three Months Ended
Transaction-based clearing expenses
Three Months Ended
2023 2022 $ Change % Change Transaction-based clearing expenses$ 69.2 $ 76.5 $ (7.3) (10)% Percentage of operating revenues 10%
14%
The decrease in transaction-based clearing expense was principally due to lower fees in theEquity Capital Markets business, which related to lower ADR fees, lower fees in the Retail Forex business, which related to decreased FX/CFD ADV, and lower fees in the Exchange-Traded Futures & Options business, principally related to a decrease in contracts traded. These decreases were partially offset by higher fees in theDebt Capital Markets business due to an increase in ADV. The decline in the percentage of operating revenues was principally due to the significant increase in interest income.
Introducing broker commissions
Three Months Ended
2023 2022 $ Change % Change Introducing broker commissions$ 42.2 $ 43.2 $ (1.0) (2)% Percentage of operating revenues 6% 8% The decrease in introducing broker commission expense was principally due to lower revenues within our Independent Wealth Management and Retail Forex businesses, resulting in lower costs, and lower expense in our Financial Ag and Energy business due to product mix traded, partially offset by higher costs in our Asset Management business as well as incremental expense from the CDI acquisition, effectiveOctober 31, 2022 . The decline in the percentage of operating revenues was principally due to the significant increase in interest income. Interest expense
Three Months Ended
2023 2022 $ Change % Change Interest expense attributable to: Trading activities: Institutional dealer in fixed income securities$ 119.4 $ 1.9 $ 117.5 6,184 % Securities borrowing 8.3 4.9 3.4 69 % Client balances on deposit 37.2 0.6 36.6 n/m
Short-term financing facilities of subsidiaries and other direct interest of operating segments
13.8 6.7 7.1 106 % 178.7 14.1 164.6 1,167 % Corporate funding 14.9 10.6 4.3 41 % Total interest expense$ 193.6 $ 24.7 $ 168.9 684 % The increase in interest expense attributable to trading activities was principally due to an increase in short term interest rates, an increase in ADV in our fixed income business, an increase in client balances on which we pay interest.
The increase in interest expense attributable to corporate funding was principally due to higher short-term interest rates on our revolving credit facility as well as an increase in average borrowings.
37 --------------------------------------------------------------------------------
Six Months Ended
Transaction-based clearing expenses
Six Months Ended March
31,
2023 2022 $ Change % Change Transaction-based clearing expenses$ 136.5 $ 147.4 $ (10.9) (7) % Percentage of operating revenues 10 % 15 % The decrease in transaction-based clearing expense was principally due to lower fees in theEquity Capital Markets business, related to lower ADR fees, the Retail Forex business, related to FX/CFD ADV, and the Exchange-Traded Futures & Options business, related to a decrease in contracts traded. These decreases were partially offset by higher fees in theDebt Capital Markets business due to an increase in ADV. The decline in the percentage of operating revenues was principally due to the significant increase in interest income.
Introducing broker commissions
Six Months Ended March
31,
2023 2022 $ Change % Change Introducing broker commissions$ 79.0 $ 81.5 $ (2.5) (3) % Percentage of operating revenues 6 % 8 % The decrease in introducing broker commission expense was principally due to lower revenues within our Independent Wealth Management and Retail Forex businesses, resulting in lower costs, and lower expense in our Financial Ag and Energy business due to product mix traded, partially offset by higher costs in our Asset Management and Global Payments businesses as well as incremental expense from the CDI acquisition, effectiveOctober 31, 2022 . The decline in the percentage of operating revenues was principally due to the significant increase in interest income. Interest expense Six Months Ended March 31, 2023 2022 $ Change % Change Interest expense attributable to: Trading activities: Institutional dealer in fixed income securities$ 215.7 $ 4.9 $ 210.8 4,302 % Securities borrowing 16.2 10.6 5.6 53 % Client balances on deposit 73.7 1.0 72.7 n/m
Short-term financing facilities of subsidiaries and other direct interest of operating segments
27.4 13.3 14.1 106 % 333.0 29.8 303.2 1,017 % Corporate funding 29.3 22.4 6.9 31 % Total interest expense$ 362.3 $ 52.2 $ 310.1 594 % The increase in interest expense attributable to trading activities was principally due to an increase in short term interest rates, an increase in ADV in our fixed income business, an increase in client balances on which we pay interest.
The increase in interest expense attributable to corporate funding was principally due to higher short-term interest rates on our revolving credit facility as well as an increase in average borrowings.
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. 38 -------------------------------------------------------------------------------- The table below presents a disaggregation of consolidated net operating revenues used by management in evaluating our performance, for the periods indicated: Three Months Ended March 31, Six Months Ended March 31, 2023 2022 % Change 2023 2022 % Change Net Operating Revenues (in millions): Listed derivatives$ 53.6 $ 62.8 (15)%$ 102.2 $ 112.9 (9)% OTC derivatives 57.8 62.5 (8)% 100.3 109.1 (8)% Securities 84.2 104.1 (19)% 177.6 176.6 1% FX / CFD contracts 50.8 85.8 (41)% 88.9 146.9 (39)% Global Payments 46.1 38.0 21% 98.2 77.2 27% Physical contracts 43.7 35.8 22% 94.7 72.3 31% Interest, net / fees earned on client balances 68.1 9.1 648% 117.7 16.6 609% Other 16.9 16.2 4% 34.7 30.4 14% Corporate Unallocated (21.8) (14.0) 56% (32.9) (27.9) 18%$ 399.4 $ 400.3 -%$ 781.4 $ 714.1 9%
Compensation and Other Expenses
The following table shows a summary of expenses, other than interest and transactional expenses. Three Months Ended March 31, Six Months Ended March 31, (in millions) 2023 2022 % Change 2023 2022 % Change Compensation and benefits: Variable compensation and benefits$ 121.8 $ 124.1 (2)%$ 240.3 $ 224.5 7% Fixed compensation and benefits 110.7 83.0 33% 191.2 157.6 21% 232.5 207.1 12% 431.5 382.1 13% Other expenses: Trading systems and market information 17.8 16.9 5% 35.5 33.0 8% Professional fees 11.3 13.8 (18)% 27.2 25.7 6% Non-trading technology and support 16.2 12.8 27% 31.0 25.8 20% Occupancy and equipment rental 10.6 8.8 20% 19.5 17.5 11% Selling and marketing 14.2 14.3 (1)% 27.1 25.3 7% Travel and business development 5.8 3.0 93% 11.5 5.9 95% Communications 2.1 2.1 -% 4.3 4.0 8% Depreciation and amortization 13.1 11.3 16% 25.8 20.4 26% Bad debts, net of recoveries 3.0 12.3 (76)% 3.7 12.1 (69)% Other 15.3 16.9 (9)% 34.7 28.8 20% 109.4 112.2 (2)% 220.3 198.5 11% Total compensation and other expenses$ 341.9 $ 319.3 7%$ 651.8 $ 580.6 12% 39
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Three Months Ended
Compensation and Other Expenses: Compensation and other expenses increased
Compensation and Benefits:
Three Months Ended March 31, (in millions) 2023 2022 $ Change % Change Compensation and benefits: Variable compensation and benefits Front office$ 103.6 $ 109.0 $ (5.4) (5)%
Administrative, executive, and centralized and local operations
18.2 15.1 3.1 21% Total variable compensation and benefits 121.8 124.1 (2.3) (2)%
Variable compensation and benefits as a percentage of net operating revenues
30%
31%
Fixed compensation and benefits: Non-variable salaries 66.5 55.8 10.7 19%
Employee benefits and other compensation, excluding share-based compensation
34.9 23.0 11.9 52% Share-based compensation 9.3 4.2 5.1 121% Total fixed compensation and benefits 110.7 83.0 27.7 33% Total compensation and benefits 232.5 207.1 25.4 12%
Total compensation and benefits as a percentage of operating revenues
33%
38%
Number of employees, end of period 3,839 3,335 504 15% 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, as well as the impact of annual merit increases. Employee benefits and other compensation, excluding share-based compensation, increased principally due to higher severance, payroll taxes, benefits, and retirement costs. During the three months endedMarch 31, 2023 , severance costs were$12.1 million , principally related to a reorganization within the Global Payments business. During the three months endedMarch 31, 2022 , severance costs were$1.3 million . Partially offsetting the increases was an increase in employee-elected deferred incentive, which is exchanged for restricted stock that will be amortized over a thirty-six month period following the grant date. Share-based compensation contains stock option and restricted stock expense, including$3.1 million in accelerated share-based compensation for employee departures that are related to retirements and certain business reorganizations. Other Expenses: Other non-compensation expenses decreased$2.8 million , or 2%, to$109.4 million in the three months endedMarch 31, 2023 compared to$112.2 million in the three months endedMarch 31, 2022 . Trading systems and market information increased$0.9 million , principally due to higher market information costs in theDebt Capital Markets , Retail Forex and Financial Ag & Energy businesses, partially offset by lower trading system costs.
Professional fees decreased
Non-trading technology and support increased
Travel and business development increased
Depreciation and amortization increased$1.8 million , principally due to the incremental depreciation expense from internally developed software placed into service, as well as higher amortization on leasehold improvements and intangibles acquired.
Other expenses decreased
Bad debts, net of recoveries decreased$9.3 million over the prior year. During the three months endedMarch 31, 2023 , bad debts, net of recoveries were$3.0 million , principally related to a client receivable in the Physical Ag & Energy business. During the three months endedMarch 31, 2022 , we recorded bad debts of$12.3 million , principally due to$9.8 million within the Commercial segment, including$5.9 million of client trading account deficits in the Financial Ag & Energy business, and$3.3 million of client receivables in the Physical Ag & Energy business. Additionally, we recorded$2.1 million of bad debt expense within the Institutional segment, including$1.6 million of client receivables in theEquity Capital Markets business and 40 --------------------------------------------------------------------------------
Other Gain: The results of the three months ended
Provision for Taxes: The effective income tax rate was 27% in the three months endedMarch 31, 2023 and 2022. The effective tax rate was higher than theU.S. federal statutory rate of 21% due toU.S. state and local taxes, GILTI,U.S. and foreign permanent differences, and the amount of foreign earnings taxed at higher rates.
Six Months Ended
Compensation and Other Expenses: Compensation and other expenses increased
Compensation and Benefits: Six Months Ended March 31, (in millions) 2023 2022 $ Change % Change Compensation and benefits: Variable compensation and benefits Front office$ 204.4 $ 196.2 $ 8.2 4 %
Administrative, executive, and centralized and local operations
35.9 28.3 7.6 27 % Total variable compensation and benefits 240.3 224.5 15.8 7 %
Variable compensation and benefits as a percentage of net operating revenues
31 %
31 %
Fixed compensation and benefits: Non-variable salaries 127.9 109.0 18.9 17 %
Employee benefits and other compensation, excluding share-based compensation
48.4 40.3 8.1 20 % Share-based compensation 14.9 8.3 6.6 80 % Total fixed compensation and benefits 191.2 157.6 33.6 21 % Total compensation and benefits$ 431.5 $ 382.1 $ 49.4 13 %
Total compensation and benefits as a percentage of operating revenues
32 % 38 % Number of employees, end of period 3,839 3,335 504 15 % 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, as well as the impact of annual merit increases. Employee benefits and other compensation, excluding share-based compensation, increased principally related to higher severance, payroll taxes, benefits, and retirement costs. During the six months endedMarch 31, 2023 , severance costs were$12.7 million , principally related to a reorganization within the Global Payments business. During the six months endedMarch 31, 2022 , severance costs were$2.0 million . Partially offsetting the increases was an increase in employee-elected deferred incentive, which is exchanged for restricted stock that will be amortized over a thirty-six month period following the grant date. Share-based compensation contains stock option and restricted stock expense, including$3.1 million in accelerated share-based compensation for employee departures that are related to retirements and certain business reorganizations.
Other Expenses: Other non-compensation expenses increased
Trading systems and market information costs increased$2.5 million , principally due to higher market information costs in theDebt Capital Markets and Retail Forex businesses, partially offset by lower trading system costs.
Professional fees increased
Non-trading technology and support increased$5.2 million , principally due to higher non-trading software maintenance and support costs related to various IT systems and an increase in external data center services costs. Selling and marketing costs increased$1.8 million , principally due to increased costs of hosted conferences and marketing communications materials in our Financial Ag & Energy business and increased campaigns related to our Retail Forex business.
Travel and business development increased
41 -------------------------------------------------------------------------------- Depreciation and amortization increased$5.4 million , principally due to the incremental depreciation expense from internally developed software placed into service, as well as higher amortization on leasehold improvements and intangibles acquired. Other expenses increased$5.9 million , principally due to an increase in certain litigation settlement matters, non-variable direct business costs and non-compensation employee based expenses, partially offset by lower non-income taxes and lower contingent acquisition related expense. Bad debt expense, net of recoveries decreased$8.4 million over the prior year. During the six months endedMarch 31, 2023 , bad debt expense, net of recovery was$3.7 million , principally related to client receivables in the Physical Ag & Energy business and client trading account deficits in our Retail segment of$2.9 million and$0.8 million , respectively. During the six months endedMarch 31, 2022 , bad debt expense, net of recoveries was$12.1 million , principally related to client trading account deficits in our Commercial, Institutional, and Retail segments of$9.2 million ,$2.2 million , and$0.7 million , respectively. Gain on Acquisitions and Other Gains: The results of the six months endedMarch 31, 2023 include a nonrecurring gain of$23.5 million related to the acquisition of CDI. The results of the six months endedMarch 31, 2022 included a nonrecurring gain of$6.4 million related to a foreign exchange antitrust class action settlement received inMarch 2022 . Provision for Taxes: The effective income tax rate was 23% for the six months endedMarch 31, 2023 and 24% for the six months endedMarch 31, 2022 . The gain on acquisition of$23.5 million in the six months endedMarch 31, 2023 was not taxable and reduced the effective income tax rate 3.2%. The effective income tax rate for the six months endedMarch 31, 2023 and 2022 was higher than theU.S. federal statutory rate of 21% due toU.S. state and local taxes, changes in valuation allowances,U.K. bank tax,U.S. permanent differences, and the amount of foreign earnings taxed at higher tax rates.
Variable vs. Fixed Expenses
The table below sets forth our variable expenses and non-variable expenses as a percentage of total non-interest expenses for the periods indicated.
Three Months Ended March 31, Six Months Ended March 31, % of % of % of % of (in millions) 2023 Total 2022 Total 2023 Total 2022 Total Variable compensation and benefits$ 121.8 27%$ 124.1 28%$ 240.3 28%$ 224.5
28%
Transaction-based clearing expenses 69.2 15% 76.5 17% 136.5 16% 147.4
19%
Introducing broker commissions 42.2 9% 43.2 10% 79.0 9% 81.5 10% Total variable expenses 233.2 51% 243.8 55% 455.8 53% 453.4 57% Fixed compensation and benefits 110.7 24% 83.0 19% 191.2 22% 157.6 19% Other fixed expenses 106.4 24% 99.9 23% 216.6 25% 186.4 23% Bad debts, net of recoveries 3.0 1% 12.3 3% 3.7 -% 12.1
1%
Total non-variable expenses 220.1 49% 195.2 45% 411.5 47% 356.1
43%
Total non-interest expenses$ 453.3 100%$ 439.0 100%$ 867.3 100%$ 809.5
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. 42 --------------------------------------------------------------------------------
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 global payments business. We manage our business in this manner due to our large global footprint, in which we have approximately 3,800 employees allowing us to serve clients in more than 180 countries.
Our business activities are managed as operating segments and organized into reportable segments as shown below.
StoneX Group Inc. Commercial Institutional Retail Global Payments Primary Activities: Primary Activities: Primary Activities: Primary Activities: Financial Ag Equity Capital Retail Forex Global Payments & Energy Markets Physical Ag Debt Capital Retail Precious Metals Payment Technology & Energy Markets Services Precious Metals FX Prime Brokerage Independent Wealth Management 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.
43 --------------------------------------------------------------------------------
Total Segment Results
The following table shows summary information concerning all of our business segments combined. Three Months EndedMarch 31 , Six Months EndedMarch 31 , (in millions) 2023 % of Operating Revenues 2022 % of Operating Revenues 2023 % of Operating Revenues 2022 % of Operating Revenues Revenues: Sales of physical commodities$ 15,506.2 $ 15,864.2 $ 27,909.6 $ 29,783.1 Principal gains, net 254.0 323.7 509.3 574.6 Commission and clearing fees 131.1 139.0 249.7 255.5 Consulting, management, and account fees 38.7 24.5 77.9 47.7 Interest income 237.6 34.5 429.7 68.6 Total revenues 16,167.6 16,385.9 29,176.2 30,729.5 Cost of sales of physical commodities 15,456.6 15,838.0 27,813.4 29,728.9 Operating revenues 711.0 100% 547.9 100% 1,362.8 100% 1,000.6
100%
Transaction-based clearing expenses 69.4 10% 75.9 14% 136.5 10% 146.3
15%
Introducing broker commissions 42.2 6% 43.2 8% 79.0 6% 81.7 8% Interest expense 178.2 25% 14.5 3% 333.0 24% 30.6 3% Net operating revenues 421.2 414.3 814.3 742.0 Variable direct compensation and benefits 104.5 15% 109.6 20% 206.0 15% 197.3 20% Net contribution 316.7 304.7 608.3 544.7 Fixed compensation and benefits 61.0 46.0 106.1 85.5 Other fixed expenses 73.3 63.3 146.2 118.7 Bad debts, net of recoveries 3.0 12.3 3.7 12.1 Total non-variable direct expenses 137.3 19% 121.6 22% 256.0 19% 216.3 22% Other gain - 6.4 - 6.4 Segment income $ 179.4$ 189.5 $ 352.3 $ 334.8
Three Months Ended
Net contribution for all of our business segments increased$12.0 million , or 4%, to$316.7 million in the three months endedMarch 31, 2023 compared to$304.7 million in the three months endedMarch 31, 2022 . Segment income decreased$10.1 million , or 5%, to$179.4 million in the three months endedMarch 31, 2023 compared to$189.5 million in the three months endedMarch 31, 2022 .
Six Months Ended
Net contribution for all of our business segments increased$63.6 million , or 12%, to$608.3 million in the six months endedMarch 31, 2023 compared to$544.7 million in the six months endedMarch 31, 2022 . Segment income increased$17.5 million , or 5%, to$352.3 million in the six months endedMarch 31, 2023 compared to$334.8 million in the six months endedMarch 31, 2022 .
Commercial
We offer our commercial clients a comprehensive array of products and services, including risk management and hedging services, execution and clearing exchange-traded and OTC products, voice brokerage, market intelligence and physical trading, as well as commodity financing and logistics services. We believe providing these high-value-added products and services differentiates us from our competitors and maximizes our opportunity to retain our clients. 44 -------------------------------------------------------------------------------- The tables below present the financial performance, a disaggregation of operating revenues, and select operating data and metrics used by management in evaluating the performance of the Commercial segment, for the periods indicated. Three Months Ended March 31, Six Months Ended March 31, (in millions) 2023 2022 % Change 2023 2022 % Change Revenues: Sales of physical commodities$ 15,279.3 $ 15,631.2 (2)%$ 27,428.7 $ 29,327.6 (6)% Principal gains, net 74.9 99.7 (25)% 144.6 175.8 (18)% Commission and clearing fees 44.5 49.2 (10)% 83.3 88.0
(5)%
Consulting, management and account fees 6.4 5.0 28% 12.9 10.4 24% Interest income 45.6 7.4 516% 74.7 14.3 422% Total revenues 15,450.7 15,792.5 (2)% 27,744.2 29,616.1 (6)% Cost of sales of physical commodities 15,230.6 15,608.4 (2)% 27,341.7 29,279.4 (7)% Operating revenues 220.1 184.1 20% 402.5 336.7 20% Transaction-based clearing expenses 14.6 14.5 1% 27.8 27.5
1%
Introducing broker commissions 9.9 9.5 4% 17.4 15.8 10% Interest expense 10.5 4.3 144% 19.5 7.9 147% Net operating revenues 185.1 155.8 19% 337.8 285.5 18% Variable direct compensation and benefits 44.2 46.2 (4)% 81.2 85.2 (5)% Net contribution 140.9 109.6 29% 256.6 200.3 28% Fixed compensation and benefits 16.3 13.0 25% 30.0 24.6 22% Other fixed expenses 19.3 16.7 16% 38.0 30.9 23% Bad debts, net of recoveries 2.4 9.8 (76)% 2.9 9.2
(68)%
Non-variable direct expenses 38.0 39.5 (4)% 70.9 64.7 10% Segment income $ 102.9$ 70.1 47%$ 185.7 $ 135.6 37% Three Months Ended March 31, Six Months Ended March 31, (in millions) 2023 2022 % Change 2023 2022 % Change Operating revenues (in millions): Listed derivatives$ 61.0 $ 73.0 (16)%$ 114.8 $ 130.7 (12)% OTC derivatives 57.9 62.4 (7)% 100.4 109.1 (8)% Physical contracts 51.9 37.2 40% 105.6 74.6 42% Interest / fees earned on client balances 43.4 6.3 589% 69.5 11.7 494% Other 5.9 5.2 13% 12.2 10.6 15%$ 220.1 $ 184.1 20%$ 402.5 $ 336.7 20%
Select data (all $ amounts are
8,625 8,005 8% 16,511 15,504 6% Listed derivatives, average rate per contract (1)$ 6.97 $ 8.65 (19)%$ 6.75 $ 7.99 (16)% Average client equity - listed derivatives (millions)$ 1,971 $ 2,013 (2)%$ 2,053 $ 1,864 10% OTC derivatives (contracts, 000's) 858 738 16% 1,576 1,500 5% OTC derivatives, average rate per contract$ 67.94 $ 84.98 (20)%$ 64.37 $ 72.85 (12)%
(1) Give-up fees, as well as cash and voice brokerage revenues are excluded from the
calculation of listed derivatives, average rate per contract.
Three Months Ended
Operating revenues increased$36.0 million , or 20%, to$220.1 million in the three months endedMarch 31, 2023 compared to$184.1 million in the three months endedMarch 31, 2022 . Net operating revenues increased$29.3 million , or 19%, to$185.1 million in the three months endedMarch 31, 2023 compared to$155.8 million in the three months endedMarch 31, 2022 . Operating revenues derived from listed derivatives declined$12.0 million , or 16%, to$61.0 million in the three months endedMarch 31, 2023 compared to$73.0 million in the three months endedMarch 31, 2022 . This decline was principally due to a 19% decrease in the average rate per contract as the prior year period experienced wider spreads in LME markets related to the Russian invasion ofUkraine and the resulting effect on base metal commodity prices. This decline was partially offset by an 8% increase in overall listed derivatives contract volumes compared to the prior year period. 45 -------------------------------------------------------------------------------- Operating revenues derived from OTC derivatives declined$4.5 million , or 7%, to$57.9 million in the three months endedMarch 31, 2023 compared to$62.4 million in the three months endedMarch 31, 2022 . This decline was principally due to a 20% decline in the average rate per contract compared to a historically strong rate per contract in the prior year period which was a result of the Russian invasion ofUkraine and its effect on agricultural and energy commodity prices. This decline was partially offset by a 16% increase in OTC derivative volumes compared to the three months endedMarch 31, 2022 . Operating revenues derived from physical contracts increased$14.7 million , or 40%, to$51.9 million in the three months endedMarch 31, 2023 compared to$37.2 million in the three months endedMarch 31, 2022 . This increase was principally due to an$11.8 million increase in operating revenues in our physical agricultural and energy business, as well as a$2.5 million increase in precious metals operating revenues compared to the three months endedMarch 31, 2022 . Operating revenues during the three months endedMarch 31, 2023 were favorably impacted by realized gains of$2.4 million on the sale of physical inventories carried at the lower of cost or net realizable value, for which losses on related derivative positions were recognized in prior periods. Operating revenues during the three months endedMarch 31, 2022 were also favorably impacted by realized gains of$1.8 million on the sale of physical inventories carried at the lower of cost or net realizable value, for which losses on related derivative positions were recognized in prior periods. Interest and fee income earned on client balances increased$37.1 million , or 589%, to$43.4 million in the three months endedMarch 31, 2023 compared to$6.3 million in the three months endedMarch 31, 2022 as a result of a significant increase in short term interest rates. Average client equity declined 2% to$1,971 million in the three months endedMarch 31, 2023 . Variable expenses, excluding interest, expressed as a percentage of operating revenues declined to 31% in the three months endedMarch 31, 2023 compared to 38% in the three months endedMarch 31, 2022 , primarily as a result of the increase in interest/fees earned on client balances, which is generally not a component of variable compensation. Segment income increased$32.8 million , or 47%, to$102.9 million in the three months endedMarch 31, 2023 compared to$70.1 million in the three months endedMarch 31, 2022 , principally due to the growth in operating revenues as well as a$1.5 million decline in non-variable direct expenses. The decline in non-variable direct expenses was principally driven by a$7.4 million decline in bad debts, net of recoveries, which was partially offset by a$3.3 million increase in fixed compensation and benefits, a$1.3 million increase in selling and marketing, a$0.7 million increase in travel and business development and a$0.6 million increase in depreciation and amortization, compared to the three months endedMarch 31, 2022 .
Six Months Ended
Operating revenues increased$65.8 million , or 20%, to$402.5 million in the six months endedMarch 31, 2023 compared to$336.7 million in the six months endedMarch 31, 2022 . Net operating revenues increased$52.3 million , or 18%, to$337.8 million in the six months endedMarch 31, 2023 compared to$285.5 million in the six months endedMarch 31, 2022 . Operating revenues derived from listed derivatives declined$15.9 million , or 12%, to$114.8 million in the six months endedMarch 31, 2023 compared to$130.7 million in the six months endedMarch 31, 2022 . This decline was principally driven by a 16% decline in the average rate per contract as the prior year period experienced wider spreads in LME markets related to the Russian invasion ofUkraine and the resulting effect on base metal commodity prices. This decline was partially offset by a 6% increase in listed derivative contract volumes compared to the prior year period. Operating revenues derived from OTC transactions decreased$8.7 million , or 8%, to$100.4 million in the six months endedMarch 31, 2023 compared to$109.1 million in the six months endedMarch 31, 2022 . This decline was principally driven by a 12% decline in the average rate per contract which was partially offset by a 5% increase in OTC volumes. Operating revenues derived from physical transactions increased$31.0 million , or 42%, to$105.6 million in the six months endedMarch 31, 2023 compared to$74.6 million in the six months endedMarch 31, 2022 , principally due to increased client activity in agricultural and energy commodities, including the acquisition of CDI, effectiveOctober 31, 2022 , as well as continued strong client demand for precious metals. Operating revenues during the six months endedMarch 31, 2023 were unfavorably impacted by losses on derivative positions of$1.8 million , related to physical inventories held at the lower of cost or net realizable value. Operating revenues during the six months endedMarch 31, 2022 were favorably impacted by realized gains of$2.6 million , on the sale of physical inventories carried at the lower of cost or net realizable value, for which losses on related derivative positions were recognized in prior periods. Interest and fee income earned on client balances increased$57.8 million , or 494%, to$69.5 million in the six months endedMarch 31, 2023 compared to$11.7 million in the six months endedMarch 31, 2023 , as a result of both a 10% increase in average client equity to$2,053 million as well as a significant increase in short term interest rates. Variable expenses, excluding interest, expressed as a percentage of operating revenues declined to 31% in the six months endedMarch 31, 2023 compared to 38% in the six months endedMarch 31, 2022 , primarily as the result of the increase in interest/fees earned on client balances, which is generally not a component of variable compensation. 46 -------------------------------------------------------------------------------- Segment income increased$50.1 million , or 37%, to$185.7 million in the six months endedMarch 31, 2023 compared to$135.6 million in the six months endedMarch 31, 2022 , principally due to the growth in operating revenues which was partially offset by a$6.2 million increase in non-variable direct expenses. The increase in non-variable direct expenses was primarily due to a$5.4 million increase in fixed compensation and benefits, a$1.7 million increase in selling and marketing, a$1.5 million increase in travel and business development, a$1.1 million increase in depreciation and amortization. These increases were partially offset by a$6.3 million decline in bad debts, net of recoveries. 47 --------------------------------------------------------------------------------
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 inArgentina ) 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 March 31, Six Months Ended March 31, (in millions) 2023 2022 % Change 2023 2022 % Change Revenues: Sales of physical commodities $ - $ - -% $ - $ - -% Principal gains, net 89.1 95.9 (7)% 190.3 163.3 17% Commission and clearing fees 72.9 74.7 (2)% 140.4 137.0 2% Consulting, management and account fees 18.8 5.5 242% 35.6 10.3 246% Interest income 181.7 26.7 581% 339.7 53.5 535% Total revenues 362.5 202.8 79% 706.0 364.1 94% Cost of sales of physical commodities - - -% - - -% Operating revenues 362.5 202.8 79% 706.0 364.1 94% Transaction-based clearing expenses 48.3 52.0 (7)% 95.3 101.5 (6)% Introducing broker commissions 10.1 8.3 22% 18.7 15.4 21% Interest expense 166.2 9.7 n/m 310.9 21.5 n/m Net operating revenues 137.9 132.8 4% 281.1 225.7 25% Variable direct compensation and benefits 48.6 50.5 (4)% 97.2 86.0 13% Net contribution 89.3 82.3 9% 183.9 139.7 32% Fixed compensation and benefits 16.1 13.9 16% 28.8 24.9 16% Other fixed expenses 17.3 16.3 6% 37.3 30.7 21% Bad debts, net of recoveries 0.1 2.1 (95)% - 2.2 (100)% Non-variable direct expenses 33.5 32.3 4% 66.1 57.8 14% Segment income$ 55.8 $ 50.0 12%$ 117.8 $ 81.9 44% Three Months Ended March 31, Six Months Ended March 31, (in millions) 2023 2022 % Change 2023 2022 % Change Operating revenues (in millions): Listed derivatives$ 49.5 $ 50.0 (1)%$ 95.5 $ 92.9 3% Securities 226.8 125.3 81% 439.8 222.8 97% FX contracts 9.3 8.9 4% 18.5 14.2 30% Interest / fees earned on client balances 59.2 4.0 n/m 118.5 6.6 n/m Other 17.7 14.6 21% 33.7 27.6 22%$ 362.5 $ 202.8 79%$ 706.0 $ 364.1 94% Select data (all $ amounts areU.S. dollar orU.S. dollar equivalents): Listed derivatives (contracts, 000's) 32,964 34,028 (3)% 65,276 63,242 3% Listed derivatives, average rate per contract (1)$ 1.38 $ 1.39 (1)%$ 1.33 $ 1.40 (5)% Average client equity - listed derivatives (millions)$ 5,251 $ 3,254 61%$ 5,669 $ 3,107 82% Securities ADV (millions)$ 5,759 $ 3,492 65%$ 4,995 $ 3,095 61% Securities RPM (2)$ 282 $ 554 (49)%$ 341 $ 543 (37)% Average money market /FDIC sweep client balances (millions)$ 1,374 $ 1,751 (22)%$ 1,455 $ 1,663 (13)% FX contracts ADV ( millions)$ 5,080 $ 4,171 22%$ 4,974 $ 4,051 23% FX contracts RPM$ 29 $ 33 (12)%$ 30 $ 27 11%
(1) Give-up fee 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. 48
--------------------------------------------------------------------------------
Three Months Ended
Operating revenues increased$159.7 million , or 79%, to$362.5 million in the three months endedMarch 31, 2023 compared to$202.8 million in the three months endedMarch 31, 2022 . Net operating revenues increased$5.1 million , or 4%, to$137.9 million in the three months endedMarch 31, 2023 compared to$132.8 million in the three months endedMarch 31, 2022 . Operating revenues derived from listed derivatives declined$0.5 million , or 1%, to$49.5 million in the three months endedMarch 31, 2023 compared to$50.0 million in the three months endedMarch 31, 2022 , principally due to a 3% decline in listed derivative contract volumes as well as a 1% decline in the average rate per contract. Operating revenues derived from securities transactions increased$101.5 million , or 81%, to$226.8 million in the three months endedMarch 31, 2023 compared to$125.3 million in the three months endedMarch 31, 2022 . The ADV of securities traded increased 65%, 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 of the significant increase in short term rates, we have amended our calculation of Securities RPM, in the table above, to present the RPM after deducting from operating revenues the interest expense associated with our fixed income activities. The securities RPM decreased 49% in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 , principally due to a tightening of spreads realized in equity markets. Operating revenues derived from FX contracts increased$0.4 million , or 4%, to$9.3 million in the three months endedMarch 31, 2023 compared to$8.9 million in the three months endedMarch 31, 2022 , primarily driven by a 22% increase in the ADV of FX contracts, which was partially offset by a 12% decline 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$55.2 million , to$59.2 million in the three months endedMarch 31, 2023 , principally driven by a significant increase in both average client equity and short-term interest rates. As a result of the increase in short term interest rates and the increase in ADV, interest expense increased$156.5 million , to$166.2 million in the three months endedMarch 31, 2023 compared to$9.7 million in the three months endedMarch 31, 2022 , with interest expense directly associated with serving as an institutional dealer in fixed income securities increasing$117.5 million , interest paid to clients increasing$32.6 million and interest expense directly attributable to securities lending activities increasing$3.4 million compared to the prior year period. Variable expenses, excluding interest, expressed as a percentage of operating revenues declined to 30% in the three months endedMarch 31, 2023 compared to 55% in the three months endedMarch 31, 2022 , primarily as the result of the increase in interest/fees earned on client balances, which is generally not a component of variable compensation. Segment income increased$5.8 million , or 12%, to$55.8 million in the three months endedMarch 31, 2023 compared to$50.0 million in the three months endedMarch 31, 2022 , as a result of the increase in net operating revenues noted above, a$1.9 million decline in variable compensation and a$2.0 million decline in bad debts, net of recoveries. These favorable variances were partially offset by a$2.2 million increase in fixed compensation and benefits and a$1.0 million increase in other fixed expenses.
Six Months Ended
Operating revenues increased$341.9 million , or 94%, to$706.0 million in the six months endedMarch 31, 2023 compared to$364.1 million in the six months endedMarch 31, 2022 . Net operating revenues increased$55.4 million , or 25%, to$281.1 million in the six months endedMarch 31, 2023 compared to$225.7 million in the six months endedMarch 31, 2022 . Operating revenues derived from listed derivatives increased$2.6 million , or 3%, to$95.5 million in the six months endedMarch 31, 2023 compared to$92.9 million in the six months endedMarch 31, 2022 , principally driven by a 3% increase in listed derivative contract volumes, which was partially offset by a 5% decline in the average rate per contract compared to the six months endedMarch 31, 2022 . Operating revenues derived from securities transactions increased$217.0 million , or 97%, to$439.8 million in the six months endedMarch 31, 2023 compared to$222.8 million in the six months endedMarch 31, 2022 . The ADV of securities traded increased 61%, 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 of the significant increase in short term rates, we have amended our calculation of Securities RPM, in the table above, to present the RPM after deducting from operating revenues the interest expense associated with our fixed income activities. The securities RPM decreased 37% in in the six months endedMarch 31, 2023 compared to the six months endedMarch 31, 2022 , principally due to a tightening of spreads realized in equity markets. 49 -------------------------------------------------------------------------------- Operating revenues derived from FX contracts increased$4.3 million , or 30%, to$18.5 million in the six months endedMarch 31, 2023 compared to$14.2 million in the six months endedMarch 31, 2022 , primarily driven by a 23% increase in the ADV of FX contracts traded as well as a 11% increase in the average rate per contract. Finally, interest and fee income earned on client balances, which is associated with our listed derivative business, as well as our correspondent clearing businesses, increased$111.9 million , to$118.5 million in the six months endedMarch 31, 2023 compared to$6.6 million in the six months endedMarch 31, 2022 , primarily as a result of a 82% increase in average client equity combined with a significant increase in short term interest rates. As a result of the increase in short term interest rates and the increase in ADV, interest expense increased$289.4 million , to$310.9 million in the six months endedMarch 31, 2023 compared to$21.5 million the six months endedMarch 31, 2022 , with interest expense directly associated with serving as an institutional dealer in fixed income securities increasing$210.8 million , interest paid to clients increasing$65.7 million and interest expense directly attributable to securities lending activities increasing$5.6 million compared to the prior year period. Variable expenses, excluding interest, expressed as a percentage of operating revenues declined to 30% in the six months endedMarch 31, 2023 compared to 56% in the six months endedMarch 31, 2022 , primarily as the result of the increase in interest/fees earned on client balances, which is generally not a component of variable compensation. Segment income increased$35.9 million , or 44%, to$117.8 million in the six months endedMarch 31, 2023 compared to$81.9 million in the six months endedMarch 31, 2022 , primarily as a result of the increase in net operating revenues noted above, which was partially offset by a$8.3 million , or 14% increase in non-variable direct expenses versus the six months endedMarch 31, 2022 . The increase in non-variable direct expenses was primarily related to a$3.9 million increase in fixed compensation and benefits, a$2.3 million increase in trade systems and market information, a$1.6 million increase in non-trading technology and support, a$1.4 million increase in professional fees and a$1.0 million increase in travel and business development. These increases were partially offset by a$2.2 million decline in bad debts, net of recoveries compared to the six months endedMarch 31, 2022 . 50 --------------------------------------------------------------------------------
Retail
We provide our retail clients around the world access to over 18,000 global financial markets, including spot foreign exchange ("forex"), both financial trading and physical investment in precious metals, as well as contracts for difference ("CFDs"), which are investment products with returns linked to the performance of underlying assets. In addition, our independent wealth management business offers a comprehensive product suite to retail investors in theU.S. The tables below present the financial performance, a disaggregation of operating revenues, and select operating data and metrics used by management in evaluating the performance of the Retail segment, for the periods indicated. Three Months Ended March 31, Six Months Ended March 31, (in millions) 2023 2022 % Change 2023 2022 % Change Revenues: Sales of physical commodities$ 226.9 $ 233.0 (3)%$ 480.9 $ 455.5 6% Principal gains, net 43.3 89.4 (52)% 75.1 156.6 (52)% Commission and clearing fees 11.9 13.6 (13)% 22.6 27.4 (18)% Consulting, management and account fees 12.7 13.2 (4)% 27.6 25.6 8% Interest income 9.8 0.4 n/m 14.6 0.8 n/m Total revenues 304.6 349.6 (13)% 620.8 665.9 (7)% Cost of sales of physical commodities 226.0 229.6 (2)% 471.7 449.5 5% Operating revenues 78.6 120.0 (35)% 149.1 216.4 (31)% Transaction-based clearing expenses 4.7 7.6 (38)% 10.0 13.6 (26)% Introducing broker commissions 21.7 25.1 (14)% 41.9 50.1 (16)% Interest expense 1.4 0.5 180% 2.5 1.1 127% Net operating revenues 50.8 86.8 (41)% 94.7 151.6 (38)% Variable direct compensation and benefits 2.4 6.1 (61)% 7.1 10.9 (35)% Net contribution 48.4 80.7 (40)% 87.6 140.7 (38)% Fixed compensation and benefits 11.0 14.2 (23)% 24.2 27.1 (11)% Other fixed expenses 32.1 27.0 19% 62.0 50.4 23% Bad debts, net of recoveries 0.5 0.4 25% 0.8 0.7 14% Non-variable direct expenses 43.6 41.6 5% 87.0 78.2 11% Other gain - 6.4 (100)% - 6.4 (100)% Segment income$ 4.8 $ 45.5 (89)%$ 0.6 $ 68.9 (99)% Three Months Ended March 31, Six Months Ended March 31, (in millions) 2023 2022 % Change 2023 2022 % Change Operating revenues (in millions): Securities$ 22.4 $ 26.0 (14)%$ 43.5 $ 51.2 (15)% FX / CFD contracts 52.5 90.0 (42)% 92.1 156.9 (41)% Physical contracts 2.2 3.5 (37)% 8.2 7.0 17% Interest / fees earned on client balances 0.8 0.1 700% 1.6 0.4 300% Other 0.7 0.4 75% 3.7 0.9 311%$ 78.6 $ 120.0 (35)%$ 149.1 $ 216.4 (31)%
Select data (all $ amounts are
(22)%$ 8,186 $ 9,798 (16)% FX / CFD contracts RPM$ 97 $ 131 (26)%$ 90 $ 124 (27)%
Three Months Ended
Operating revenues declined$41.4 million , or 35%, to$78.6 million in the three months endedMarch 31, 2023 compared to$120.0 million in the three months endedMarch 31, 2022 . Net operating revenues decreased$36.0 million , or 41%, to$50.8 million in the three months endedMarch 31, 2023 compared to$86.8 million in the three months endedMarch 31, 2022 . Operating revenues derived from FX/CFD contracts declined$37.5 million , or 42%, to$52.5 million in the three months endedMarch 31, 2023 compared to$90.0 million in the three months endedMarch 31, 2022 primarily as a result of a 26% decline in RPM and a 22% decline in FX/CFD contracts ADV compared to the three months endedMarch 31, 2022 . These declines were principally driven by diminished volatility and tighter trading ranges in our larger volume markets which resulted in reduced client trading activity and spread capture. 51 -------------------------------------------------------------------------------- Operating revenues derived from securities transactions, which relates to our independent wealth management activities, declined$3.6 million , or 14%, to$22.4 million in the three months endedMarch 31, 2023 compared to$26.0 million in the three months endedMarch 31, 2022 .
Operating revenues derived from physical contracts declined
Interest and fee income earned on client balances increased$0.7 million , to$0.8 million in the three months endedMarch 31, 2023 compared to$0.1 million in the three months endedMarch 31, 2022 , primarily as a result of an increase in short term interest rates. Variable expenses, excluding interest, as a percentage of operating revenues were 37% in the three months endedMarch 31, 2023 compared to 32% in the three months endedMarch 31, 2022 , with the increase in the variable rate percentage resulting from the decline in operating revenues derived from FX/CFD contracts which have a lower variable expense component. Segment income decreased$40.7 million to$4.8 million in the three months endedMarch 31, 2023 compared to$45.5 million in the three months endedMarch 31, 2022 , primarily as a result of the decline in net operating revenues noted above as well as a$2.0 million increase in non-variable direct expenses compared to the three months endedMarch 31, 2022 . In addition, the three months endedMarch 31, 2022 include a$6.4 million foreign exchange antitrust class action settlement received in our Retail forex business.
Six Months Ended
Operating revenues decreased$67.3 million , or 31%, to$149.1 million in the six months endedMarch 31, 2023 compared to$216.4 million in the six months endedMarch 31, 2022 . Net operating revenues decreased$56.9 million , or 38%, to$94.7 million in the six months endedMarch 31, 2023 compared to$151.6 million in the six months endedMarch 31, 2022 . Operating revenues derived from FX/CFD contracts declined$64.8 million , or 41%, to$92.1 million , primarily as a result of 27% and 16% declines in RPM and FX/CFD contracts ADV, respectively, compared to the six months endedMarch 31, 2022 . These declines were principally driven by diminished volatility and tighter trading ranges in our larger volume markets which resulted in reduced client trading activity and spread capture. Operating revenues derived from securities transactions, which are related to our independent wealth management activities, declined$7.7 million , or 15%, to$43.5 million in the six months endedMarch 31, 2023 compared to$51.2 million in the six months endedMarch 31, 2022 . Operating revenues derived from physical contracts increased$1.2 million , or 17%, to$8.2 million in the six months endedMarch 31, 2023 compared to$7.0 million in the six months endedMarch 31, 2022 .
Interest and fee income earned on client balances increased
Variable expenses, excluding interest, as a percentage of operating revenues were 40% in the six months endedMarch 31, 2023 compared to 34% in the six months endedMarch 31, 2022 , with the increase in the variable rate percentage resulting from the decline in operating revenues derived from FX/CFD contracts which have a lower variable expense component. Segment income decreased$68.3 million , or 99%, to$0.6 million in the six months endedMarch 31, 2023 compared to$68.9 million in the six months endedMarch 31, 2022 , primarily as a result of the decline in net operating revenues noted above. Non-variable direct expenses increased$8.8 million , or 11%, compared to the six months endedMarch 31, 2022 . The increase in non-variable direct expenses, was principally the result of a$4.2 million increase in allocated costs from our centralized marketing department, a$2.7 million increase in depreciation and amortization, a$1.2 million increase in non-trading technology and support, and a$0.8 million increase in travel and business development, which was partially offset by a$2.9 million decline in fixed compensation and benefits associated with the movement of certain retail employees to a centralized marketing department. In addition, the six months endedMarch 31, 2022 includes a$6.4 million foreign exchange antitrust class action settlement received in our Retail forex business. 52 --------------------------------------------------------------------------------
Global 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 185 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 Global Payments segment for the periods indicated. Three Months Ended March 31, Six Months Ended March 31, (in millions) 2023 2022 % Change 2023 2022 % Change Revenues: Sales of physical commodities $ - $ - -% $ - $ - -% Principal gains, net 46.7 38.7 21% 99.3 78.9 26% Commission and clearing fees 1.8 1.5 20% 3.4 3.1 10% Consulting, management, account fees 0.8 0.8 -% 1.8 1.4 29% Interest income 0.5 - n/m 0.7 - n/m Total revenues 49.8 41.0 21% 105.2 83.4 26% Cost of sales of physical commodities - - -% - - -% Operating revenues 49.8 41.0 21% 105.2 83.4 26% Transaction-based clearing expenses 1.8 1.8 -% 3.4 3.7 (8)% Introducing broker commissions 0.5 0.3 67% 1.0 0.4 150% Interest expense 0.1 - n/m 0.1 0.1 -% Net operating revenues 47.4 38.9 22% 100.7 79.2 27% Variable compensation and benefits 9.3 6.8 37% 20.5 15.2 35% Net contribution 38.1 32.1 19% 80.2 64.0 25% Fixed compensation and benefits 17.6 4.9 259% 23.1 8.9 160% Other fixed expenses 4.6 3.3 39% 8.9 6.7 33% Bad debts - - -% - - -% Total non-variable direct expenses 22.2 8.2 171% 32.0 15.6 105% Segment income$ 15.9 $ 23.9 (33)%$ 48.2 $ 48.4 -% Three Months Ended March 31, Six Months Ended March 31, (in millions) 2023 2022 % Change 2023 2022 % Change Operating revenues (in millions): Payments$ 48.5 $ 40.1 21%$ 102.7 $ 81.4 26% Other 1.3 0.9 44% 2.5 2.0 25%$ 49.8 $ 41.0 21%$ 105.2 $ 83.4 26%
Select data (all $ amounts are
16% $ 70$ 59 19% Global Payments RPM$ 11,916 $ 11,668 2%$ 11,655 $ 11,118 5%
Three Months Ended
Operating revenues increased$8.8 million , or 21%, to$49.8 million in the three months endedMarch 31, 2023 compared to$41.0 million in the three months endedMarch 31, 2022 . Net operating revenues increased$8.5 million , or 22%, to$47.4 million in the three months endedMarch 31, 2023 compared to$38.9 million in the three months endedMarch 31, 2022 . The increase in operating revenues was principally due to a 16% increase in the average daily notional payment volume as well as a 2% increase in the RPM traded. The increase in payment volume was principally due to the onboarding of new financial institution clients and increased client activity across our client base. Variable expenses, excluding interest, expressed as a percentage of operating revenues were 23% in the three months endedMarch 31, 2023 compared to 22% in the three months endedMarch 31, 2022 . Segment income decreased$8.0 million , or 33%, to$15.9 million in the three months endedMarch 31, 2023 compared to$23.9 million in the three months endedMarch 31, 2022 . This decline was primarily related to a$14.0 million increase in non-variable direct expenses, which was partially offset by the increase in net operating revenues. The increase in non-variable direct expenses was primarily driven by a$12.7 million increase in fixed compensation and benefits, including a$10.0 million 53 --------------------------------------------------------------------------------
severance charge related to a reorganization of the business. This plan will include a decline in variable compensation and benefits as a percentage of operating revenues going forward.
Six Months Ended
Operating revenues increased$21.8 million , or 26%, to$105.2 million in the six months endedMarch 31, 2023 compared to$83.4 million in the six months endedMarch 31, 2022 . Net operating revenues increased$21.5 million , or 27%, to$100.7 million in the six months endedMarch 31, 2023 compared to$79.2 million in the six months endedMarch 31, 2022 . The increase in operating revenues was primarily driven by a 19% increase in the average daily volume as well as a 5% increase in the RPM traded compared to the six months endedMarch 31, 2022 . Variable expenses, excluding interest, expressed as a percentage of operating revenues were 24% in the six months endedMarch 31, 2023 compared to 23% in the six months endedMarch 31, 2022 . Segment income decreased$0.2 million , or 0%, to$48.2 million in the six months endedMarch 31, 2023 compared to$48.4 million in the six months endedMarch 31, 2022 . This decline was primarily related to the$16.4 million increase in non-variable direct expenses, which was partially offset by the increase in net operating revenues. The increase in non-variable direct expenses was primarily driven by a$14.2 million increase in fixed compensation and benefits, including a$10.0 million in severance charge related to a reorganization of the business. This plan will include a decline in variable compensation and benefits as a percentage of operating revenues going forward.
Unallocated Costs and Expenses
The following table provides information regarding our unallocated costs and expenses. These unallocated costs and expenses include certain shared services such as information technology, accounting and treasury, credit and risk, legal and compliance, and human resources and other activities, which are not included in the results of the operating segments above. Three Months Ended March 31, Six Months Ended March 31, (in millions) 2023 2022 % Change 2023 2022 % Change Compensation and benefits: Variable compensation and benefits$ 16.0 $ 13.5 19%$ 31.5 $ 24.9 27% Fixed compensation and benefits 43.7 31.3 40% 73.6 61.3 20% 59.7 44.8 33% 105.1 86.2 22% Other expenses: Occupancy and equipment rental 10.4 8.7 20% 19.2 17.3 11% Non-trading technology and support 11.3 9.5 19% 20.9 19.1 9% Professional fees 4.7 7.3 (36)% 12.5 12.8 (2)% Depreciation and amortization 5.7 5.6 2% 11.4 10.6 8% Communications 1.5 1.4 7% 3.1 2.8 11% Selling and marketing 1.1 2.2 (50)% 2.0 2.9 (31)% Trading systems and market information 1.6 1.3 23% 3.7 2.5 48% Travel and business development 1.0 0.6 67% 2.6 1.2 117% Other 3.1 6.7 (54)% 9.3 11.6 (20)% 40.4 43.3 (7)% 84.7 80.8 5% Total compensation and other expenses$ 100.1 $ 88.1 14%$ 189.8 $ 167.0 14%
Three Months Ended
Total unallocated costs and other expenses increased$12.0 million , or 14%, to$100.1 million in the three months endedMarch 31, 2023 compared to$88.1 million in the three months endedMarch 31, 2022 . Compensation and benefits increased$14.9 million , or 33%, to$59.7 million in the three months endedMarch 31, 2023 compared to$44.8 million in the three months endedMarch 31, 2022 . The increase in variable and non-variable compensation is partially related to the move of certain client engagement teams out of discrete business lines and into shared services, and replacing compensation expense in those discrete business lines with a non-variable charge. Additionally, the increase in variable compensation is partially related to increased headcount. 54 -------------------------------------------------------------------------------- In addition, the increase in non-variable compensation is related to higher salaries due to increased headcount and annual merit increases, as well as$3.1 million in accelerated share-based compensation for employee departures that are related to retirements and certain business reorganizations. Average administrative headcount increased 20% in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 , principally within client engagement, compliance, IT, and finance. Other non-compensation expenses decreased$2.9 million , or 7%, to$40.4 million in the three months endedMarch 31, 2023 compared to$43.3 million in the three months endedMarch 31, 2022 principally due to lower legal fees, not directly related to a business and lower selling and marketing fees, due principally to the bi-annual global sales and strategy meeting held inMarch 2022 , partially offset by higher occupancy costs, principally related to an increase in property tax assessments inLondon , and non-trading technology maintenance and support for the various systems used by the support services departments.
Six Months Ended
Total unallocated costs and other expenses increased$22.8 million , or 14%, to$189.8 million in the six months endedMarch 31, 2023 compared to$167.0 million in the six months endedMarch 31, 2022 . Compensation and benefits increased$18.9 million , or 22%, to$105.1 million in the six months endedMarch 31, 2023 compared to$86.2 million in the six months endedMarch 31, 2022 . The increase in variable and non-variable compensation is partially related to the move of certain client engagement teams out of discrete business lines and into shared services as discussed above. Additionally, the increase in variable compensation is partially related to increased headcount. In addition, the increase in non-variable compensation is related to higher salaries due to increased headcount and annual merit increases, as well as the acceleration of share-based compensation related to employee departures that are related to retirements and certain business reorganizations. Other non-compensation expenses increased$3.9 million , or 5%, to$84.7 million in the six months endedMarch 31, 2023 compared to$80.8 million in the six months endedMarch 31, 2022 principally due to higher occupancy costs, principally related to an increase in property tax assessments inLondon , non-trading technology maintenance and support costs for the various systems used by the support services departments, and travel and business development costs.
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. We have historically financed our liquidity and capital needs principally with funds generated from our subsidiaries' 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.StoneX Financial Inc. is registered as a broker-dealer with theSecurities and Exchange Commission ("SEC") and is a member of both theFinancial Industry Regulatory Authority ("FINRA") and theMunicipal Securities Rulemaking Board ("MSRB"). In addition,StoneX Financial Inc. is registered as a futures commission merchant with the CFTC and NFA, and a member of various commodities and futures exchanges in theU.S. and abroad.StoneX Financial Inc. has a responsibility to meet margin calls at all exchanges on a daily basis, and 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 provisionally registered swap dealer, whose business is overseen by the NFA. CFTC 23.154, Calculation of Initial Margin rules impose requirements on registered swap dealers and certain counterparties to exchange initial margin, with phased-in compliance dates, under which we fall in the final compliance date tier recently extended toSeptember 2022 . Additionally, the CFTC finalized the proposed net capital rules applicable to swap dealers onJuly 22, 2020 , with the new rules effectiveOctober 6, 2021 . 55 -------------------------------------------------------------------------------- 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 thatStoneX Financial Inc. ,Gain Capital Group, LLC andStoneX 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 theFinancial Conduct Authority ("FCA"), the regulator of the financial services industry in theU.K. and is subject to regulations which impose regulatory capital requirements.StoneX Financial Ltd is a member of various commodities and futures exchanges in theU.K. andEurope and has the responsibility to meet margin calls at all exchanges on a daily basis and intra-day basis, as necessary.StoneX Financial Ltd is required to be compliant with theU.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.
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 ensure that our capital base, both stockholders' equity and debt, as well as available credit facilities can appropriately support the anticipated financing needs of our operating subsidiaries.
As of
A substantial portion of our assets are liquid. As ofMarch 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 56 -------------------------------------------------------------------------------- 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.
OptionSellers
InNovember 2018 , balances in approximately 300 accounts of the futures commission merchant ("FCM") division of our wholly owned subsidiary,StoneX Financial Inc. , declined below required maintenance margin levels and into deficit balances, primarily as a result of significant and unexpected price fluctuations in the natural gas markets. All positions in these accounts, which were managed byOptionSellers.com Inc. ("OptionSellers"), an independent Commodity Trading Advisor ("CTA"), were liquidated in accordance withStoneX Financial Inc.'s client agreements and obligations under market regulation standards. OptionSellers, in its role as a CTA, had been granted by each of its clients full discretionary authority to manage the trading in the client accounts, whileStoneX Financial Inc. acted solely as the clearing firm in its role as the FCM.StoneX Financial Inc.'s client agreements hold account owners liable for all losses in their accounts and obligate the account holders to reimburseStoneX Financial Inc. for any account deficits in their accounts. As ofMarch 31, 2023 , the receivable from these client accounts, net of collections and other allowable deductions was$22.0 million , with no individual account receivable exceeding$1.4 million . As ofMarch 31, 2023 , the allowance against these uncollected balances was$6.7 million . We are pursuing collection of the uncollected balances through arbitration proceedings against the account holders. We 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 fromStoneX Financial Inc. relating to the trading losses in their accounts. During the six months endedMarch 31, 2023 , we reached privately negotiated settlements of a number of arbitration proceedings, pursuant to which in most cases the accounts holders agreed to pay all or a substantial portion of their outstanding deficit balances and in some cases we agreed to make certain payments to the account holders that are not material to us, individually or in the aggregate. We intend to continue vigorously pursuing claims through arbitration and settling cases in what we determine 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 or may not be material to our financial results. However, we believe that the likelihood of a material adverse outcome is remote, and do not believe that any potential losses related to this matter would impact our ability to comply with our ongoing liquidity, capital, and regulatory requirements.
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 includingU.S. treasury bills, as well as investments inU.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 ofMarch 31, 2023 andSeptember 30, 2022 , were$21.9 billion and$19.9 billion , respectively. Our operating activities generate or utilize cash as a result of net income or loss earned or incurred during each period and fluctuations in our assets and liabilities. The most significant fluctuations arise from changes in the level of client activity, commodities prices, and changes in the balances of financial instruments and commodities inventory.StoneX Financial Inc. andStoneX Financial Ltd occasionally utilize their margin line credit facilities, on a short-term basis, to meet intraday settlements with the commodity exchanges prior to collecting margin funds from their clients.
The majority of the assets of
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 theU.S. , or earnings that would qualify for the 100 percent dividends received deduction, and earnings that would not result in any significant foreign taxes. We repatriated$8.6 million and$16.6 million for the six months endedMarch 31, 2023 and 2022, respectively, of earnings previously taxed in theU.S. , resulting in no 57 --------------------------------------------------------------------------------
significant incremental taxes. Therefore, the Company has not recognized a deferred tax liability on its investment in foreign subsidiaries.
Senior Secured Notes
InJune 2020 , we issued$350 million in aggregate principal amount of our 8.625% Senior Secured Notes due 2025 (the "Notes") at the offering price of 98.5% of the aggregate principal amount. We used the net proceeds from the sale of the Notes to fund the preliminary cash consideration for the acquisition of Gain on the closing date, to pay certain related transactions fees and expenses, and to fund the repayment of Gain's 5.00% Convertible Senior Notes due 2022, with the exception of$0.5 million which was redeemed inAugust 2022 . 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 onJune 15, 2025 . Interest on the Notes accrues at a rate of 8.625% per annum and is payable semiannually in arrears onJune 15 andDecember 15 of each year, commencing onDecember 15, 2020 . We incurred debt issuance costs of$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, sinceJune 15, 2022 , to redeem the Notes, in whole or in part, at the redemption prices set forth in the indenture.
Committed Credit Facilities
As ofMarch 31, 2023 , we had four committed bank credit facilities, totaling$1,130.0 million , of which$533.6 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 three-year first-lien senior secured syndicated loan facility committed until
•An unsecured line of credit committed untilDecember 11, 2023 , under which$180.0 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 untilJuly 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 untilOctober 14, 2023 , under which our subsidiary,StoneX Financial Ltd is entitled to borrow up to$75.0 million , subject to certain terms and conditions of the credit agreement. This facility is intended to provide short-term funding of margin to commodity exchanges as necessary. 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 ofMarch 31, 2023 , we and our subsidiaries are in compliance with all of our financial covenants under the outstanding facilities. In accordance with required disclosure as part of our three-year syndicated revolving loan facility, during the trailing twelve months endedMarch 31, 2023 , interest expense directly attributable to trading activities includes$273.1 million in connection with trading activities conducted as an institutional dealer in fixed income securities, and$28.6 million in connection with securities lending activities. As reflected above, certain of the Company's committed credit facilities are scheduled to expire during the next twelve months following the quarterly period endedMarch 31, 2023 . The Company intends to renew or replace the other 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.
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
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Other Capital Considerations
Our activities are subject to various significant governmental regulations and capital adequacy requirements, both in theU.S. and in the international jurisdictions in which we operate. Our subsidiaries are in compliance with all of their capital regulatory requirements as ofMarch 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 ("StoneX Markets"), is a CFTC provisionally registered swap dealer, and under these capital rules is subject to a minimum regulatory capital requirement. StoneX Markets 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 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 aggregateBank 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. During 2016, CFTC 23.154, Calculation of Initial Margin rules came into effect, imposing new requirements on registered swap dealers and certain counterparties to exchange initial margin, with phased-in compliance dates, withStoneX Markets LLC falling in the final compliance date tier ofSeptember 2022 . 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. StoneXMarkets 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 ofU.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 ofU.S. Treasury securities representing investment of clients' funds andU.S. Treasury securities pledged or redeemed by particular clients in lieu of cash margin are presented as operating uses and sources of cash, respectively, within the operating section of the consolidated statements of cash flows if they have an original or acquired maturity of greater than 90 days. Typically, there is an offsetting use or source of cash related to the change in the payables to clients. However, we will report a use of cash in periods where segregatedU.S. Treasury securities that meet the aforementioned definition of a segregated cash equivalent mature and are replaced withU.S. Treasury securities that have original or acquired maturities that are greater than 90 days. Our cash, segregated cash, cash equivalents, and segregated cash equivalents decreased by$567.8 million from$6,285.1 million as ofSeptember 30, 2022 to$5,717.3 million as ofMarch 31, 2023 . During the six months endedMarch 31, 2023 , net cash of$602.7 million was used in operating activities,$28.6 million was used in investing activities and net cash of$52.4 million was provided by financing activities. Net cash provided by financing activities during the six months endedMarch 31, 2023 included significant inflows from payables to lenders under 90 days of$67.0 million . Outflows related to payments of deferred acquisitions costs of$17.2 million . Also, we recorded$3.6 million in funds received for 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, 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 59 --------------------------------------------------------------------------------
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$22.5 million in capital expenditures for property and equipment during the six months endedMarch 31, 2023 compared to$24.3 million during the prior year. Additionally, we expended$6.1 million of net cash on the Company's acquisitions.
Fluctuations in exchange rates increased our cash, segregated cash, cash
equivalents and segregated cash equivalents by
OnAugust 23, 2022 , our Board of Directors authorized the repurchase of up to 1.0 million shares of our outstanding common stock in open market purchases and private transactions, commencing onOctober 1, 2022 and ending onSeptember 30, 2023 . 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. Apart from what has been disclosed above, there are no known trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources. Based upon our current operations, we believe that cash flows from operations, available cash and available borrowings under our credit facilities will be adequate to meet our future liquidity needs for the following year. Any projections of future earnings and cash flows are subject to substantial uncertainty, particularly in light of the rapidly changing market and economic conditions created by the COVID-19 pandemic. We may need to access debt and equity markets in the future if unforeseen costs or opportunities arise, to meet working capital requirements, fund acquisitions or investments or repay our indebtedness under credit facilities. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions, as well as our financial condition and results of operations at the time we seek additional financing. Although we believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our operations for the foreseeable future, the challenges posed by COVID-19 on our business are expected to continue to shift rapidly. Consequently, we will continue to assess our liquidity needs and anticipated capital requirements in light of future developments, particularly those relating to COVID-19.
Commitments
Information about our commitments and contingent liabilities is contained in Note 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 60 -------------------------------------------------------------------------------- such clients to be offset in the event of a client default. Management believes that the margin deposits held as ofMarch 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. As a broker-dealer inU.S. Treasury obligations,U.S. government agency obligations, agency mortgage-backed obligations, and asset-backed obligations, we are engaged in various securities trading, borrowing and lending activities serving solely institutional counterparties. Our exposure to credit risk associated with the nonperformance of counterparties in fulfilling their contractual obligations pursuant to these securities transactions and market risk associated with the sale of securities not yet purchased can be directly impacted by volatile trading markets which may impair their ability to satisfy outstanding obligations to us. In the event of non-performance and unfavorable market price movements, we may be required to purchase or sell financial instruments, which may result in a loss to us. We transact OTC and foreign exchange contracts with our clients, and our OTC and foreign exchange trade desks will generally offset the client's transaction simultaneously with one of our trading counterparties or will offset that transaction with a similar, but not identical, position on the exchange. These unmatched transactions are intended to be short-term in nature and are conducted to facilitate the most effective transaction for our client. 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 ofMarch 31, 2023 andSeptember 30, 2022 , at fair value of the related financial instruments, totaling$2,570.9 million and$2,469.6 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 toMarch 31, 2023 , which might be partially or wholly offset by gains in the value of assets held as ofMarch 31, 2023 . The totals of$2,570.9 million and$2,469.6 million include a net liability of$209.7 million and$313.4 million for derivatives, based on their fair value as ofMarch 31, 2023 andSeptember 30, 2022 , 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 ofMarch 31, 2023 andSeptember 30, 2022 .
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. 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. 61 --------------------------------------------------------------------------------
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
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