May 9, 2013
Executives
William J. Dunaway - Chief Financial Officer and Chief Accounting Officer Sean Michael O'Connor - Chief Executive Officer, Director, Chief Executive Officer of IAHC (Bermuda) Ltd., Chief Executive Officer of INTL Trading Inc and Director of IAHC (Bermuda) Ltd.
Analysts
William R. Jones - Singular Research James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC
Operator
Good day, everyone, and welcome to the INTL FCStone Q2 FY '13 Earnings Call. Today's call is being recorded.
At this time, I'd like to turn the call over to Bill Dunaway. Please go ahead
William J. Dunaway
Good morning. My name is Bill Dunaway, CFO of INTL FCStone Inc.
Welcome to our earnings conference call for the fiscal second quarter ended March 31, 2013. After the market closed yesterday, we issued a press release reporting our earnings for the fiscal second quarter.
The press release is available on our website at www.intlfcstone.com, as well as a slide presentation, which we will refer to on this call in our discussions of our quarterly and year-to-date results. This slide presentation is available by clicking on the Investor Relations link on the website and then going into the Events & Presentations page.
You'll need to sign on to the live webcast in order to view the presentation. Both the presentation and an archive of the webcast will also be available on our website after the call's conclusion.
Before getting underway, I'd like to cover a couple of housekeeping items. On these conference calls and in the management discussion portions of our SEC filings, we present financial information on a non-GAAP basis in order to take into account mark-to-market adjustments in our physical commodity product lines, which are included in both our CRM and Other segments.
As discussed on previous conference calls and in our filings, the requirements of accounting principles generally accepted in the U.S., which I'll refer to as GAAP, to carry derivatives at fair market value but physical commodities inventory at the lower of cost or market value may have a significant temporary impact on our reported earnings. Under GAAP, gains and losses on commodities inventory and derivatives, which the company intends to be offsetting, are recognized in different periods.
Additionally, in certain circumstances, GAAP does not require us to reflect changes in estimated values of forward commitments to purchase and sell commodities. For this reason, we believe that the GAAP numbers do not reflect the commercial results of our physical commodity product lines, and therefore, the company as a whole.
Instead, we assess all of our businesses, as do our banks, on a fully mark-to-market basis in our daily and monthly internal financial reporting. Readers of our Form 10-Q filings should review the selected summary financial information within Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, for a summary of both GAAP and non-GAAP information.
This section also gives the reconciliation between GAAP and non-GAAP information required by the SEC. Please note that whenever we talk about an adjusted number on this call, we are talking about a non-GAAP number.
Secondly, we're required to advise you and all participants should note that the following discussions should be taken in conjunction with the most recent financial statements and notes thereto, as well as the Form 10-Q filed with the SEC. This discussion may contain 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, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements.
The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance.
With that, I'll now turn the call over to Sean O'Connor, the company's Chief Executive Officer.
Sean Michael O'Connor
Thanks, Bill, and good morning, everyone. Our Q2 2013 results were below our expectations due to tough market conditions, which were largely due to cyclical issues in the grain market and generally lower volatility in all asset classes.
Despite the very challenging market conditions for us, the company remained profitable. Our aggregate mark-to-market revenues in our Commodity segment was down 19% versus a year ago, largely due to a decline in revenues from our ag business, which is a material portion of our commodities revenues.
The record drop last year resulted in a small amount of grain sitting in storage, which needed to be hedged, combined with much lower prices, which has not provided an incentive for hedging of new crop production. We feel this is largely a cyclical issue and the flip side of the very positive market conditions we had a couple of quarters ago, when the drought conditions resulted in record high prices and elevated volatility.
It is likely that there will be a record crop coming to market this year, which again could result in good fundamentals for this part of our business. Despite generally lackluster market conditions during the quarter, our Other segments performed very well, with foreign exchange in our Global Payments business up 24% versus a year ago and Securities up 55%.
The good growth in Securities was driven largely by the Tradewire acquisition coming on stream and ramping up ahead of our original expectations. As mentioned in the last call, management's primary objective has been to sharpen our focus on integrating all of our acquisitions, growth initiatives and new capabilities to realize revenue synergies and cost efficiencies.
Our net margin on incremental revenue is a little over 50% and therefore, small and perhaps seemingly insignificant changes in gross revenue can have a meaningful impact on the bottom line. We have continued to make good progress in rationalizing and cutting unproductive costs.
Offsetting this has been an increase in cost due to compliance cost over the last year, as well as the costs associated with the Tradewire acquisition, as well as some other small add-ons. The net result of all of this is our overall costs have flattened dramatically and in certain key areas, are now starting to show a decline.
This is the first time we've seen a decline in our overall costs in, really, the last 10 years. The financial world has become more competitive and there's still significant surplus capacity out there.
Being a low-cost provider is and will continue to be our focus. A continuing part of our management responsibility is to reevaluate our businesses to ensure that the strategy remains consistent with the overall group, and the long-term potential return on capital is acceptable and consistent with our objectives.
This is a constant process that requires us to make short-term changes to existing businesses, and in certain instances, exiting activities where we believe the long-term strategy and return on capital is no longer consistent with our objectives. During the last 18 months, we have terminated a number of small initiatives that did not seem to be gaining traction or where it became clear that they would not be consistent with our long-term objectives.
During this last quarter, we took the decision to exit the physical-based metals business for the same reasons. This business will take some time to wind down, and this process should be largely completed by fiscal year end in September.
The net effect of this on a pro forma basis would be savings of around $5 million on the pretax line and a likely $100 million reduction in our funding needs for this business, which are currently provided from our commodity financing syndicate. This will also free up around $20 million of equity to be redeployed elsewhere.
May 1 has come and gone, and the world, as we know it, has changed forever as Dodd-Frank is now a reality. We have spent over a year preparing for this and it has been expensive, time-consuming and frustrating process, which I think we have come through very well.
It is interesting to note that we are one of the very few nonbank swap dealers. The change from a world dominated by banks and bilateral trading to collateralized trading on exchanges and swap execution facilities is going to dramatically change our industry.
It occurs to us that most mid-sized entities looking for execution capabilities will now have to place more margin up to the counterparties and would likely to prefer to have all their collateral in fewer places to allow better leverage of this capital to support all of the execution requirements. We seem to be one of the few mid-sized financial companies that can offer execution and exchanges through futures, swaps through our swap dealer, securities through our broker dealer and foreign exchange in global payments.
We think that we may be ideally placed to become the mid-sized financial counterparty of choice to mid-sized financial entities in this new market environment. This could be a significant long-term opportunity to leverage the platform we have built.
I'll now hand you over to Bill Dunaway for a discussion of the financial results.
William J. Dunaway
Thank you, Sean. I'd like to start my discussion with the review of the quarterly results and will refer to the fifth page of the slide presentation titled Quarterly Financial Dashboard.
This slide lays out the quarterly operating results, as well as related balance sheet information in comparison to the prior year period, as well as in some cases, the internal target, which management has for our operating results. Adjusted operating revenues were $116.6 million for the current period, which represents a 4% decline from the $121.9 million in the second quarter of 2012.
Adjusted operating revenues were relatively flat with $116.5 million recorded in the first quarter 2013. Adjusted operating revenues in the first quarter, however, included $9.2 million in realized gains in the sale of our LME and Kansas City Board of Trade shares.
And thus, excluding those nonrecurring revenues from the first quarter, second quarter adjusted operating revenues increased 9% over the immediately preceding quarter. While the core CRM adjusted operating revenues declined and the CES segment was relatively flat, all other segments of the company's experienced growth in adjusted operating revenues in the second quarter as compared to the prior year.
Looking at our revenues on a segmental basis, adjusted operating revenues in our Commodity & Risk Management Services segment decreased 19% from $68 million in the prior year period to $55 million in the second quarter of 2013. Adjusted operating revenues increased 7% as compared to the first quarter revenues at $51.4 million.
Our CRM segment is further broken down into 3 different product lines: soft commodities, precious metals and base metals. Starting with soft commodities.
Operating revenues decreased 21% from $54.2 million in the second quarter of 2012 to $42.8 million in the current period. First quarter 2013 revenues were $40.5 million.
Exchange traded contract volumes decreased 17% and OTC contract volumes decreased 26%, respectively, over the prior year period. The decrease in exchange traded contract volumes, primarily driven by lower volatility and the effect on customer demand of inverted prices in agricultural commodities, contributed to a 3% decrease or $500,000 in commission and clearing fee revenues as compared to the prior year period.
The decline in OTC contract volumes, primarily in Latin America and Brazil, contributed to a $10.8 million decrease in overall OTC revenues. Average investable client balances were $900 million for the current period, a 2% increase over the prior year.
A 29% decline in the number of ounces traded, primarily in the Far Eastern and the U.S. markets, drove a $600,000 decline in adjusted operating revenues in our precious metals product line to $2.8 million.
First quarter revenues were $2.6 million. Adjusted operating revenues in our base metals product line decreased $1 million from $10.5 million in the second quarter of 2012 to $9.5 million in the current period.
First quarter revenues were $8.2 million. The decline in revenues, as compared to the prior year, was primarily driven by a change in management strategy, resulting in a plan to exit the physical base metals business.
This decision, which will leave our LME metals operations unaffected, resulted in a $3.3 million decrease in physical base metals revenues to $1.8 million in the current period. This decline in physical base metals adjusted operating revenues were partially offset by a $2.3 million increase in revenues from the LME Metals Team to $7.7 million in the current period.
This was flat with first quarter adjusted operating revenues from the LME Metals Team of $7.7 million. Moving on to the foreign exchange segment.
Operating revenues increased 24% in the second quarter to $16.1 million as compared to the $13 million in the prior year quarter. Current quarter operating revenues were relatively flat with first quarter revenues of $16.2 million.
Operating revenues in the Global Payments product line increased 8% from $8.6 million in the prior year to $9.3 million, primarily as a result of a 3% increase in the volume of trades combined with the widening of spreads. Operating revenues in the customer speculative foreign exchange product line increased $500,000 to $2.3 million in the second quarter as compared to the prior year.
Operating revenues from customer hedging activities increased 26% as compared to the prior year to $2 million. And the proprietary foreign exchange arbitrage desk, which arbitrages the cash versus the exchange traded markets, experienced 128% increase in operating revenues to $2.5 million as compared to the prior year.
However, this was a slight decline from the $2.7 million in the first quarter of 2013. In our Securities segment, operating revenues increased by 55% from $10.3 million in the prior year to $16 million in the current quarter.
This is also a 24% increase over the first quarter revenues of $12.9 million. This segment includes 2 product lines: the equity market making business and the debt capital markets.
Operating revenues in the equities market making increased 43% from $6 million in the prior year to $8.6 million in the current period. This increase is primarily related to the transfer of institutional accounts from Tradewire Securities LLC, which occurred late in the first quarter of 2013, which contributed $2.4 million in operating revenues for the current period.
Operating revenues in our debt capital market product line, which includes both investment banking, as well as our debt trading, include -- increased $4.3 million in the prior year period to $7.5 million in the current quarter, primarily driven by a $2.8 million increase in debt trading in Argentina, primarily in the blue chip swap. In the Clearing and Execution segment, operating revenues were $25.3 million in the second quarter of 2013, which was relatively flat with the prior year, but it represented a 13% increase over the $22.4 million in the first quarter of 2013.
Revenues were flat with the prior year period despite an 11% drop in exchange traded volume, mainly as a result of decreased volatility in the markets. An increase in the commission rate per contract offset this decline in volumes.
Average investable client balances in the current period increased 18% as compared to the prior year to $661 million. Operating revenues in our Other segment, which contains both our asset management and commodity origination and financing product lines, increased $3.6 million in the prior year to $4.3 million in the second quarter of 2013.
Assets under management as of March 31, 2013, were $395 million compared to $466 million as of March 31, 2012. This decline in assets under management was primarily a result of the sale of our Uruguayan asset management business, Gletir, in the second quarter of 2013.
The current period includes the $200,000 gain recognized on the sale of this business. Operating revenues in the asset management product line decreased $100,000 to $2 million in the current period.
Operating revenues in the commodity financing and origination product line increased 87% to $2.7 million as compared to the prior year period as a result of both increase in commodity financing arrangements, as well as origination sales. Now back to the Slide #5 in the dashboard.
Noninterest expenses were $113 million for the second quarter of 2013, a 1% increase over the $112.4 million in the second quarter of last year. This is a 9% increase as compared to $103.4 million in the first quarter of 2013, which is primarily driven by higher variable expenses related to increase in operating revenues over that period after excluding the gain on the exchange share sales in the first quarter.
Internally, the company targets key variable expenses as a percentage of total expenses in excess of 50%. During the current period, the majority of noninterest expenses were variable, with 54% of total noninterest expenses being variable in nature as compared to 55% in the prior year period.
Total non-variable expenses include fixed expenses, as well as bad debts and impairments. During the second quarters of both 2012 and '13, we recorded no significant bad debts or impairments.
Fixed expenses were $52.3 million for the second quarter of 2013, which represents a $1.7 million increase over the second quarter of last year. This increase was primarily a result of higher restricted stock and stock option expense, as well as the addition of Tradewire Securities in the first quarter of 2013.
Fixed expenses were $50.4 million in the first quarter of 2013. The company targets to keep total compensation expense as a percentage of adjusted operating revenues at less than 40%.
In the second quarter of 2013, we are above this goal at 44.6%, primarily as a result of the aggregate level of operating revenues. In the prior year period, compensation and benefits were 45.2% of adjusted operating revenues.
Compensation and benefits expenses decreased 6% from $55.1 million in the prior year period to $52 million in the current quarter. The variable portion of compensation and benefits decreased 17% from $27.4 million in the second quarter of 2012 to $22.8 million in the current quarter, while the fixed portion of compensation and benefits increased 5% from $27.7 million in the prior year period to $29.2 million in the current period, primarily as a result of the increased equity compensation in the Tradewire acquisitions I noted earlier.
The average number of employees increased to 1,102 for the second quarter of 2013 as compared to 1,040 in the prior year period. Our second largest expense is clearing and related costs, which increased 7% over the prior year quarter to $29.1 million.
This increase primarily relates to higher ADR conversion fees, increased transactional charges in the FX business and the impact of the acquisitions of the LME Metals Team and Tradewire Securities. These increases were partially offset by the 12% decrease in overall exchange traded volumes.
First quarter 2013 clearing and related costs were $25 million. The adjusted net income from continuing operations for the second quarter was $1.1 million versus $3.8 million in the prior year.
We're taking a longer view over the trailing 12 months. Adjusted net income and adjusted EBITDA increased 73% and 31%, respectively, over the year-ago period.
The company looks to achieve a minimum return on equity of 15% or greater on its adjusted stockholder's equity, and for the current period, the company was well below their target of 1.3%. The ROE for the prior year period was 5.1%.
Total assets on the balance sheet increased 25% to $3.2 billion, while total adjusted stockholder's equity closed the period at $332.6 million, an 8% increase over the prior year. Another key metric the company's focus is on is keeping a 1:1 ratio between revenue-generating employees and administrative or operating employees.
Along these operating -- along these lines, the company targets to have at least $500,000 in annualized revenues across the entire employee base. For the current period, this metric is $423,000 per employee as compared to $468,000 for the prior year period.
On November 15, 2012, the company's Board of Directors authorized a repurchase plan in which the company may repurchase up to 1.5 million shares of its outstanding common stock. During the second quarter of 2013, the company did not repurchase any shares of outstanding common stock in open market transactions.
Finally, in closing of the review of the quarter results, the trailing 12-month results have led to an increase of 8% in the book value per share, closing out the quarter at $17.35 per share. Next, I'd like to direct you to Slide #6 of the presentation for a short review of the year-to-date results.
Adjusted operating revenues increased 8% or $18.1 million to $233.1 million for the first 6 months of fiscal 2013 as compared to the prior year. Adjusted operating revenues in the CRM segment declined 7% or $8.4 million as compared to the prior year.
However, all segments of the company -- all other segments of the company experienced revenue growth as compared to the first 6 months of the prior year. Adjusted operating revenues in the Securities and the Other segments each grew at 43% as compared to the prior year, while the CES and FX revenues grew 11% and 5%, respectively.
Total noninterest expenses increased 4% to $216.4 million, primarily related to the increase in variable expenses related to the 8% growth in adjusted operating revenues. 53% of the total expenses were variable in nature as compared to 54% in the prior year period.
Non-variable expenses increased $6.6 million or 7%, primarily related to the acquisition of the LME Metals Team, the TRX Futures and Tradewire Securities, as well as increased costs related to the current regulatory environment and particularly Dodd-Frank compliance costs. The adjusted net income from continuing operations increased $7.2 million to $8.6 million for the current fiscal year-to-date period, which represents a 5.2% return on equity, which is below our stated goal of 15%.
The return on equity for the first 6-month period of the prior year was 1%. With that, I would like to turn it back to Sean to wrap up.
Sean Michael O'Connor
Thanks, Bill. Generally, we believe market conditions remain tough for us and most external proxies such as market volumes and performance by our competitors indicate this.
We are critically dependent on customer volumes generally and market volatility specifically. Cyclical factors in certain of our commodity verticals can cause significant volatility in quarterly results, as we've seen this quarter and also in the record Q4 quarter last year.
While we cannot control any of these factors, we can -- we do continue to expand our core customer base at a very high rate and have also worked hard to diversify our revenue sources by vertical market and region. All of these factors have served us well over the long term.
And as our many growth initiatives start to ramp up, we should see even greater diversification. We are pleased to see that our expenses are starting to flatten.
This has been a core focus for the management team, and we are now seeing tangible signs of progress on the cost side. So with that, I'd like to turn it back to the operator and open up for questions, if there are any.
Operator?
Operator
[Operator Instructions] And we'll take our question from Bill Jones with Singular Research.
William R. Jones - Singular Research
I just want to ask, the return on equity target that you had, for as long as I've followed the company, of mid-teen or 15%, do you think that, that is still reasonable? Or do you think about that in the current environment with regulations?
Sean Michael O'Connor
Yes, well, I think what we generally said, and we don't like to change long-term targets unless we have to, but we've always said, I think probably for 10 years now, that our long-term targets, return on equity is 15%. I think there can be a reasonably significant delta around that, up or down, based on market conditions.
In 2011, which was pre the MF Global kind of collapse, which was sort of the Lehman situation for our industry, we did, making some small adjustments for noncash items, we did about 17% ROE. And last year, we were sort of in the high-single digits, which was a really tough year for us and I think we're sort of coming out of that.
But clearly, in the short term, our numbers are way below that. So I do think we like to set long-term growth targets.
We want to shoot for long-term targets. But in the short term, we can see some significant deltas around that, and deltas are caused by things like interest rates.
I mean, we have a significant push on interest rates by market volatility. And then of course, we have some cyclical factors.
And I think the better way to look at our results, honestly, is sort of the trailing 12 months, so you can even out some of those short-term fluctuations. And then what's left is more cyclical sort of medium, short-term-type industry issues.
And I think we're in a pretty strong headwind at the moment, as is the rest of the industry. So to answer your question more specifically, I think in the current environment 15% is very challenging.
I don't see many companies out there making 15%. But we set targets.
We're long-term investors. We set targets for the long term.
Makes sense?
William R. Jones - Singular Research
Okay, I think so. And then we sit here, it's May 9, can you -- obviously, you said conditions are still challenging.
Can you say anything more specific about the early Q3 relative to Q2?
Sean Michael O'Connor
We definitely don't -- we do not like to give any sort of forward-looking guidance at all. It's still too early in the quarter for us to sort of have a feel for how things can play out.
So we'll just have to see how it goes. So the answer is, no, we're not going to tell you anything.
Sorry.
William R. Jones - Singular Research
Fair enough. There's a press release on the website about account transfer agreement with First Capital.
Can you talk about any color on that?
Sean Michael O'Connor
Yes, you've seen that on our Securities side. We started making some moves.
I mean, that was the original business of the company. We have a very strong presence in the foreign OTC-traded market for equities.
These are big name companies, Nestlé, for example, Sharp, Nintendo, Porsche. All these companies do not trade on either the New York or NASDAQ.
That's been a traditional business we've been in for ages. We're very well recognized by our customers for that.
And we've now started to see some opportunities as stock market conditions have started to weed out competitors to expand that business. So the Tradewire acquisition was the first part of that, and that was a very complementary business, which really handled the flow into the U.S.
Our traditional equities market making business is really handling U.S. investors investing in overseas stocks that are not listed.
So what we now are getting is the reciprocal flow of that. And the Tradewire acquisition came on board.
It was a very easy deal for us in the sense there wasn't a big purchase price. We already took over the team and gave them an earn-out.
That business has ramped up pretty nicely. And this addition that you're mentioning, which is -- it's backed, First American clearing, really provides us with a clearing and custody solution for these broker-dealers in the emerging markets who are looking for us to help them execute their U.S.-bound flow.
So not only can we now be the execution counterparty, but we can also custody their assets. And it's really sort of a prime brokerage-type business.
We really bulk up those assets and then we custody them in turn with a big clearer locally. So it's moving our Securities business almost in line with what we have on the futures side.
As I mentioned in my script, I think it kind of gives us a really interesting capacity because I think we're one of the few mid-sized firms now who can deal cross-asset class and custody and hold assets for people. And I think with the Dodd-Frank world, it's still too early to know how everything is going to play out but I think that's going to be a very valuable capacity for us.
So it's a small acquisition. Again, not a lot of money, but certainly gives us a good start in building that capacity up, but all part of our Securities business, which is now sort of expanding quite significantly over the last 6 or 9 months.
So kind of an interesting time for us, though.
Operator
And we'll take our next question from Justin Hughes with Philadelphia Financial.
James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC
You mentioned the MF Global event as being kind of an industry-changing event that's permanently impacted profitability. I just wondered if there are specific rule changes that have happened.
I know there's been some rules on client segregation of funds. I mean, is that what you're talking about?
And second of all, if there have been specific rule changes, do you expect them to reverse those rules in order for you to get back to a double-digit ROE?
Sean Michael O'Connor
Okay. Well, I'm sure Bill can chime in here because he knows more detail about some of the stuff than I do.
But I think the 2 broad factors we're talking about is when MF Global happened, I guess, 18 months ago, right, the industry in terms of volumes kind of came to a standstill, and it hit us pretty hard. I mean, we estimate we'd lost, I don't know, anywhere between $50 million and $70 million of revenue in the first half of last fiscal year just because people were panicked.
They didn't know where their collateral was. They didn't know what was happening.
And I think it's taken -- I think, certainly, the situation is better now, but I think it's taken a long time for people to become more confident with who they deal with. And there's a shakeup in the industry happening because of that.
And we think we're probably a net beneficiary of that. We see that we are opening a lot of new accounts.
So people are coming to us. And I would like to think we're sort of on the upper end of the quality spectrum, so maybe people are moving from smaller FCMs to us.
So that's sort of what's happening on the revenue side. On the regulatory side is, as a response to what happened with both MF Global and Peregrine, there has been a significant ratcheting up of compliance across the board, specific rules in terms of how we deal with customer funds, general oversights, day-to-day compliance and supervisory procedures.
I mean, the whole thing has just been ratcheted up. And in some instances, it was probably due for that, the industry, honestly, if you look at where it stood, say, compared to the securities industry.
But this is all more cost, more aggravation for everyone. And so you're sort of dealing with higher cost and uncertain revenue environment, although that's probably correcting a little bit.
So that's sort of what happened with MF Global. So I've said on previous call, I think MF Global, for us and for the industry, was bad in the short term.
Well, it's bad for the industry probably long term. It was bad for us short term.
But medium and long term, it may be a good thing for us, and in some instances, even for the industry. The industry's going to just become better regulated, probably going to catch up to where other financial industries are in terms of oversights and supervision.
And we'd like to think, given that we feel we run a good business and a well-capitalized business, we should be a beneficiary as people become more selective and demanding. So I think it's a short-term thing.
I'm not sure we're totally out of that yet because we're dealing with some of the cost impacts of that. But it's not something that we feel should inhibit our long-term returns and should stop us being kind of where we want to be long term.
Short term, clearly, it's going to have an impact and it's still having an impact on our short-term returns. I don't know, Bill, if you want to add anything?
William J. Dunaway
No, I think it's very well covered.
Sean Michael O'Connor
Justin, does that answer your question?
James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC
Yes. What about the rules, the specific rules on the client fund segregation?
How much of those impacted your profitability?
Sean Michael O'Connor
Well, I wouldn't say that -- Justin, this is Bill. I wouldn't say that they specifically have adjusted the affected profitability in any way.
Certainly, long term, some of the proposed rules that they're looking at under which ultimately FCMs will be responsible for covering customer deficits and segregated accounts on a real-time basis throughout the day. That has effect -- I mean, that could significantly push costs down to the customer level of them having to maintain more and more funds with FCMs, which may inhibit the amount that they're doing -- they trade.
But that remains to be seen whether or not those rules are actually changed in that manner. But that's just a...
James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC
So it's your expectation that they're going to increase collateral, which you're asking from the client. So it's not going to impact you directly, but it's going to make their trading cost more expensive?
William J. Dunaway
It could, yes. I mean, the FCMs won't really have a choice but to push that down to, ultimately, clients if regulatory change like that has to come through.
Sean Michael O'Connor
Well, Justin, I think there's probably 2 general themes coming through from the regulators. One is that they want more capital supporting trading, and the other rule is they want more collateral supporting tradings.
Two different things, right? So the problem is, for the FCM industry as a whole, the entire industry is unprofitable in our estimation.
There is -- there's not an FCM out there, other than probably us, who's making a return. And if they are making a return like us, it's not a return that justifies the capital investments at this point.
So if the regulators start wanting more capital in the industry as a whole, I don't know why anyone would do that. I mean, it would be an uneconomic kind of investment.
So your response to that would be you would raise your rates to your customers and that would probably lead to less revenue and it would mean you have to raise your rates even more. At some point, there has to be an equilibrium where capital earns a return.
So that's sort of on the capital side. And then, again, on making sure there is more collateral from customers, I think the regulators are saying, "We want the FCMs to put up the collateral.
Well, that's more capital." So either we push that requirement down to the customer and then the customer has the problem and he's got to go to his bank and he's got to find more money and that may lead to less volume, or we've got to do it and then we're back into the capital argument.
So it's going to be interesting to see how they square the circle. I think it's very easy for regulators just to say, "Oh, it's great for everyone if there's more capital supporting the business."
But there's consequences for that, and capital needs to earn an economic return. And if it doesn't, there will be cost changes, and that may impact the very people they're trying to protect.
We don't know how that's all going to play out.
James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC
Okay. And then related question.
You said longer term, you could benefit from Peregrine and MF Global going away. But if you have someone -- if you have a potential client walk into your office and he said, "I'm with a small FCM.
I'm little -- I'm concerned. I want to move my account," what's your pitch to them on why they should come to INTL rather than if they're worried about financial soundness not going to Goldman, JPMorgan or if you want an independent guy, Newedge, going to one of the big 3 or 4 market leaders, but just going from a small firm to a mid-sized firm?
Sean Michael O'Connor
Okay. Well, there are couple of things.
I mean, firstly, the banks have the exact same challenges that we have. The only difference is the banks' cost structures are multiples of what ours are.
And so a lot of banks don't want mid-sized accounts anymore. So the kind of customers we're targeting, I don't think they have the choice necessarily to go to a Goldman's.
Goldman's doesn't want the kind of business we do. They can't make any money out of it.
So the question is, are you going to stay with a small private firm? Are you going to come to us?
Or are you going to go to one of our peer group companies? And I think every time we've seen this kind of scenario happen, and it's happening in the broker-dealer market, 25 FCMs have closed down in the last 9 months.
There probably are going to be another 60 closed down. The costs of running this business have gone up and it's creating a barrier to entry.
The business that was at the bottom end of the market is going to have to go up the ladder. And some of those guys will go into the big banks, but I don't think the big banks want the sort of mid-sized business.
It just -- it doesn't pay for them. But like everything, there's a tiering of where the customers fit and you've got to target for our sort of core space.
And if anything, I think what we're seeing is banks are kicking out mid-sized customers who're now looking for alternatives. And where do they go?
So we may be in the spot where we're getting sort of the smaller customers being kicked out of the banks and the bigger customers so the small guys are coming up to us. So it's hard for us to know how it's working.
All we know is we're signing up a lot of new accounts at 400, 500 new accounts sort of every month, which is, orders of magnitude, larger than we've ever done before.
Operator
And we have no further questions at this time. I will turn it back to Mr.
O'Connor for any additional or closing remarks.
Sean Michael O'Connor
Okay. Well, I think that concludes our call.
So thanks, everyone, for participating. See you next time.
Operator
This concludes today's conference. Thank you for your participation.