StoneX Group Inc (SNEX) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your INTL FCStone Q4 Fiscal Year-end Earnings Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Bill Dunaway, CFO.

Sir, you may begin.

Operator, we're not hearing Bill.

I'm back on, Sean.

It had just -- the call just literally dropped.

Okay.

Go ahead, Bill.

Good morning.

My name is Bill Dunaway.

Welcome to our earnings conference call for our fiscal fourth quarter ended September 30, 2018.

After the market closed yesterday, we issued a press release reporting our results for our fourth fiscal quarter of 2018.

This 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.

You'll need to sign on to the live webcast in order to view the presentation.

The presentation and an archive of the webcast will be available on our website after the call's conclusion.

Before getting underway, we are required to advise you, and all participants should note, that the following discussion should be taken in conjunction with the most recent financial statements and notes thereto as well as the Form 10-K 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 that 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 will now turn the call over to Sean O'Connor, the company's CEO.

Thanks, Bill.

Good morning, everyone, and thanks for joining our fiscal 2018 year-end earnings call.

We had another good performance in the fourth quarter of fiscal 2018, with operating revenues up 19% over the prior year quarter, with all of our segments showing revenue growth for the quarter.

Segment net income was roughly similar to a year ago, excluding the coal matter.

Please note that on this call, all my references to the fourth quarter of last year or fiscal 2017 as a whole will exclude the impact of the coal matter.

These adjusted figures are non-GAAP measures, and the reconciliation of these non-GAAP measures to GAAP are detailed in our earnings release, which is posted on our Investor Relations page of our website.

Segment net income was down across the board versus the immediately preceding Q3, due to a combination of more muted volatility in the commodities after all the tariff activity in Q3, as well as reduced margins in the Debt Capital Markets due to a flat yield curve and tough conditions in Argentina, which affected both Debt Capital Markets and Asset Management businesses.

Our net earnings for the quarter were $15.7 million or $0.81 per share, roughly in line with the adjusted results a year ago.

ROE for the quarter was 12.7% after the 2 preceding quarters of exceptionally strong 20% ROEs.

On an annual basis, operating revenues were a record $975.8 million, up 24% from a year ago.

Every one of our segments achieved record revenues for the year off the back of generally strong transaction -- transactional volume increases, all of which we think were greater than industry growth, implying increased market share across the board.

Against the strong revenue growth, we are able to hold fixed costs to a 6% annual increase, driving operational leverage to the bottom line.

We broke through $100 million in pretax GAAP earnings for the first time in our history, with a strong 75% increase over the adjusted results last time.

Our aggregate segment income in fiscal 2018 increased 21% versus the prior year adjusted results, with all of our segments showing growth except for Securities, due to the difficult market conditions I just mentioned.

Our net earnings were $55.5 million, or $2.87 per share.

But excluding the impact of the tax reform in Q1 and physical coal, our adjusted earnings were a record $76.3 million, or $3.98 per share.

In reviewing our record performance of 2008 (sic) [2018], I would also like to review our progress more generally and highlight some items of a more strategic nature.

Increasingly, our businesses are becoming focused around, firstly, commercial clients, which are real businesses looking to hedge and mitigate their financial risks inherent in their operating businesses; and secondly, institutional clients, looking to either invest or trade in the financial markets.

In addition to this, we have our Global Payments platform was increasingly driven by banks and financial institutions and in many ways is a technology-driven platform.

Dealing first with our commercial client offering.

Through our Commercial Hedging and Physical Commodities segments, we provide our 7,000 to 10,000 commercial clients globally with a high value-added and high-touch service that we believe differentiates us from our competitors.

Our services are designed to quantify the financial risk inherent in the production process, and provide value-added strategic risk mitigation solutions.

We have, over the years, dramatically expanded our capabilities to include listed Exchange-Traded Futures & Options to basic OTC instruments that offer greater flexibility, as well as structured OTC products designed for customized solutions.

We also have a Physical Commodities capability in both metals and the agricultural markets, where we can, on a selective basis, assist our clients in procuring or marketing commodities or byproducts, arrange logistics support and financing for these products or embed risk management programs in physical contracts to allow clients to avoid hedge accounting complications.

We believe that this set of exchange-listed OTC structured products as well as physical capabilities is unmatched, and we are seeing more extensive use of all of our capabilities by these commercial clients.

This creates the kind of sticky relationships which are both meaningful for the clients, as we can solve most, if not all of their hedging requirements, and are more valuable annuity-type revenue streams for us.

We are developing technology to do this more efficiently and better leverage our experienced brokers.

We are looking to launch a digitized interface with all of our clients, giving them a 360-degree view of all of their touch points with our organizations -- organization, and at the same time, allowing our brokers to view the entire integrated view of the client's relationship with us.

We have already digitized our market intelligence offering, allowing us to track the usefulness of each individual report, as well as identify potential marketing leads from reader patterns.

During 2018, we launched a platform that allows clients to build structured products online from a set of building blocks and simulate outcomes to determine best combination of product, all with live pricing.

New volume drivers in our Precious Metals business are an industry-leading platform as well as the first-in-the-industry online capability for pricing physical precious metals to desired locations, inclusive of currency and logistics costs.

All of these tools are customized around our commercial client's specific needs in order to provide them with greater convenience and value added.

We believe that we have a best-in-class offering for these commercial clients, and this is now a core global franchise for us which is gaining market share.

Moving on to our institutional client offering.

Through our Securities and Clearing & Execution Services, or CES, segments, we service our global institutional clients by providing liquidity and trade execution, as well as electronic access through a wide variety of technology platforms in a number of important global markets, including over 40 derivative exchanges, most global securities exchanges, as well as a variety of global execution facilities and liquidity sources.

Our clients include professional traders; funds; institutional money managers; commercial bank trust and investment departments; broker dealers; insurance companies; introducing broker dealers and their clients.

Asset and product types include listed futures and options on futures; equities; mutual funds; equity options; corporate government municipal bonds; and unit investment trusts.

We believe that we are one of the leading market makers in foreign securities, including unlisted ADRs, GDRs and foreign ordinary shares.

We act as an institutional dealer in fixed income securities, including United States Treasury, United States government agency, agency mortgage-backed and asset-backed securities.

We provide brokerage services across the fuel, crude oil and metal distillates markets over 200 clients throughout the EMEA markets.

As part of our integrated offering, we provide competitive and efficient clearing on major futures and securities exchanges globally, as well as prime brokerage in major foreign currency pairs and swap transactions.

Additionally, we provide clearing of foreign exchange transactions and a wide range of OTC products.

Over the last 3 years, we have significantly expanded our institutional capabilities and client footprint with the acquisition of Sterne Agee's correspondent wealth management and clearing business and the G.X. Clarke institutional dealer in the U.S. government securities, agencies and mortgage-backed securities.

We have also organically started a municipals desk, which has gained traction during 2018, and have launched an institutional equities agency capability this year as well.

During late 2018, we started to leverage our clearing and custody capabilities into a prime brokerage capability for hedge funds, a new client segment for us.

On November 30, we closed the Carl Kliem acquisition, which we've discussed before, an interdealer broker based in Luxembourg.

This business consists of 40 people bringing a long-standing and diverse client base consisting of over 400 institution and banks, giving us a meaningful footprint in a key market in Europe.

We believe that our more diverse capabilities and product set can add value and relevance to these clients and drive revenue, making this a nice tuck-in acquisition.

In addition, this is a fully regulated business within the European Union, providing us an avenue to a Brexit solution.

Later today, you should see an announcement relating to our acquisition of GMP Securities, a broker-dealer formerly known as Miller Tabak, which has an institutional fixed income business focused on high yield, convertibles, emerging market debt and certain equities.

Miller Tabak has over 2,400 institutional relationships globally, who will benefit from our broader institutional product offering, including commodities, derivatives, FX and global payments.

This acquisition also expands our current fixed income product offering to our existing clients beyond treasuries, agencies, municipals and ABS.

We have made big strides in building out our institutional offering and client footprints and are becoming increasingly recognized for our breadth of product offering and capabilities.

Moving on to Global Payments.

We provide global payment solutions to banks and commercial businesses as well as charities, NGOs and government organizations.

We offer payment services with competitive and transparent pricing in approximately 140 currencies, which we believe is more than any other payment solution provider.

Our proprietary FX secured Global Payments platform is integrated with financial information exchange known as FIX protocol, which is an electronic communication method for real-time exchange of information, and we believe it represents one of the first FIX offerings for cross-border payments in non-G20 currencies.

Additionally, as a member of SWIFT, we are able to offer our services to large money center global banks seeking more competitive international payment services.

During 2018, we upgraded our regulatory status in Brazil and now have a fully-fledged domestic payments capability, handling both inbound and outbound payments.

This is one of the major payments corridors, and we saw an immediate and noticeable uptick in volume and size of inbound payments.

And over the medium term, we hope to see the same for outbound payments.

In addition, we've broadened our technology offering by acquiring PayCommerce, an authorized SWIFT hosting service, allowing us to offer this value add to all our in-country banks and larger clients.

We believe we are a disruptor in the payments business and offer significant value for our bank corporate, NGO and charities clients, providing competitive and transparent payment solutions, particularly in non-G20 currencies, through an efficient technology platform.

This is validated by the fact that most of the world's established NGOs and most of the world's largest banks now use us for their payments.

Now moving on to recent events.

Most of our shareholders know our financial north star has been to compound our shareholder capital to become a bigger and more valuable business.

This approach enables us to create our own capital runway for growth.

And as a result, we are less dependent on the capital markets, and thus can be flexible and opportunistic in approaching them.

In short, we'll only take on capital when it is available and priced right from our perspective.

During late fiscal 2018, we saw an opportunity to access the public debt markets.

Unfortunately, the increased market volatility made it difficult for first-time issuers, and the pricing levels demanded at the time became unacceptable to us.

As an opportunistic issuer, we're able to retain our discipline and decided not to proceed at this time.

As part of this process, we received for the first time a holding company issuer rating of BB- and Ba3 by S&P and Moody's, respectively.

While moderate volatility is a key driver for our business, extreme volatility causes liquidity stress on our clients, who must maintain margin deposits with us on the positions which we clear on their behalf.

If they cannot meet their margin funding obligations on a timely basis, liquidation of their open positions may be required to mitigate further market exposure in their accounts.

This may result in a negative balance in their account following such liquidations, and in turn, may expose us to charge-offs if they fail to meet their obligations.

Our risk mandate is to calibrate the risks we are exposed to in our role as clearing firm for our clients, to ensure that such exposures are appropriate relative to our capital base and earnings.

It is essential that we consider the impact of outlier events called Black Swans.

We stress each and every large account under an extreme scenario, generally assuming market moves of multiples of the exchange margin requirements, and then assessing the resulting impact on liquidity and capital.

These stress tests are many standard deviations worse than the norm.

Our objective here is to ensure that such an outsized event, while remote, does not exceed single-digit percentages of our equity capital base, and therefore, does not affect the ability of the company to continue to operate effectively.

After our 2018 fiscal year-end, we experienced an extreme event where both natural gas and crude oil experienced historic moves.

In the case of natural gas, the daily move on successive days reached multiples of the standard exchange requirements.

A number of our accounts in the futures commission merchant, the FCM, managed by a commodity trading advisor, or CTA, were adversely affected by these price moves.

While we had required significantly increased margin upfront from these accounts, the price moves were so extreme that all positions in these accounts had to be liquidated, resulting in a significant aggregate debit balance.

It should be noted that the CTA in question, OptionSellers.com is registered with the CFTC and has an exemption from certain registration requirements based on advising qualified eligible persons.

Qualified eligible persons are individuals or entities that must meet or exceed certain minimum financial requirements.

This CTA had been granted full discretionary authority by their account holders to manage the trading in their accounts, while we executed and cleared the trades in our capacity as futures commission merchant.

Our customer agreements with each of these customers conform to NFA guidance.

We disclose the risks to which the account holders are exposed, hold account holders liable for all losses in their accounts and obligate account holders to reimburse the company for any account deficits in their account.

To date, approximately 1/3 of these account holders have paid their debits.

As of the close of business, December 11, 2018, aggregate receivable from these customer accounts net of collections and other allowable deductions thus far is just over $31 million, with no individual receivable balance exceeding $1.4 million.

We continue to pursue collection of these receivables in the ordinary course of business.

The company intends to both enforce and to defend its rights aggressively and claim both interest and costs of collection where applicable.

The customers' standard agreements provide for arbitration of disputes between the parties.

It is also noteworthy that S&P reviewed our rating post this event and reaffirmed our BB- corporate issuer rating.

With that, I will hand you over to Bill Dunaway for a discussion of the financial results.

Bill?

Thank you, Sean.

I'll be referring to slides and the information we have made available as part of the webcast, specifically starting with Slide #3, which shows our performance over the last 5 fiscal quarters.

The top of Slide 3 of the chart, which depicts our reported net income, earnings per share and ROE over the last 5 quarters, while the bottom of the slide shows the same metrics on an adjusted basis, removing the effect of tax reform and the previously disclosed bad debt on physical coal.

The only difference between our GAAP net income and adjusted net income for the fourth quarter of fiscal 2018 was a $300,000 reduction of income tax related to tax reform.

Moving on to Slide #4, which represents a bridge between operating revenues for the fourth quarter of last year to the current fiscal fourth quarter, operating revenues were $243.2 million in the current period, up $38.1 million or 19% versus the prior year.

As shown, all operating segments showed revenue growth over the prior year, led by our Clearing & Execution Services segment, which added $16.7 million or 25% in operating revenues, driven by a $17 million increase in Exchange-Traded revenues, which was offset slightly by lower FX Prime Brokerage revenues.

The growth in Exchange-Traded revenues was driven by both a 27% increase in client volumes and a $3.9 million increase in interest income.

The increase in interest income was a result of an increase in short-term interest rates and a 17% increase in average client equity to $1.3 billion in this segment.

Our Securities segment added $11.4 million or 31% in operating revenues versus the prior year.

Our Equity Capital Markets business, which we have previously referred to as Equity Market-Making, increased operating revenues by $9.5 million or 74% versus the prior year.

A 50% increase in gross dollar volume traded and a $3.5 million increase in interest income from securities lending activities were the key drivers behind this growth.

Our Debt Capital Markets business, which we previously referred to as Debt Trading and which now also includes our investment banking activities, had operating revenues of $25.1 million, which represented 22% growth versus the prior year.

This growth in Debt Capital Markets was driven by higher revenues in our domestic institutional fixed income business, which was partially offset by weaker performance in Argentina as a result of difficult economic conditions in that country, including the deterioration of the value of the peso and a spike in short-term interest rates.

Asset Management operating revenues, which we conduct only in Argentina, declined 90%, to $300,000 in the fourth quarter of 2018, due to the same difficult market conditions as our Debt Capital Markets business in that country.

Our largest segment, Commercial Hedging, added $1.7 million in operating revenues versus the prior year, to $69 million.

Exchange-Traded revenues increased 8% versus the prior year, while OTC revenues declined 13%.

Exchange-Traded revenues benefited from increased activities from clients in both food service and dairy markets as well as in soft commodities, such as coffee, cotton and sugar.

In addition, interest income in this business increased 58% to $6.8 million, driven by higher short-term interest rates and a 7% increase in average client equity, to $1 billion.

This growth was partially offset by a decline in OTC revenues, driven by 21% decline in the average rate per contract, driven by narrowing of spreads in the global grain and energy markets.

Our Global Payments segment added $3.1 million in operating revenue, or 14%, to $25.2 million, despite an 8% decline in the number of payments made versus the prior year, as the average revenue per payment increased 23%.

Similar to prior quarters of fiscal 2018, the decline in the number of payments has been primarily driven by certain commercial clients who had previously transacted high volumes of low-value payments through our platform, who have now opened local bank accounts in certain countries, and we have pivoted to making higher value but lower volumes of funding payments into their accounts.

Overall, this has resulted in higher revenues from these clients, while reducing operational expenses related to the high volume of low-value payments.

Physical Commodities added $4.1 million or 35% in operating revenues versus the prior year, with growth in Physical Ag & Energy revenues offsetting a modest decline in Precious Metals.

The net gain showed in unallocated overhead operating revenues include a $2.2 million gain on economic hedges in place against the effect of the devaluation of Argentine peso, which partially offset the weaker performance in our Debt Capital Markets and Asset Management businesses in that country.

The next Slide, #5, represents a bridge from 2017 fourth quarter pretax loss of $22.5 million to pretax income of $20.5 million in the current period.

This $42.5 million positive variance was primarily driven by the $47 million bad debt on physical coal in our Physical Commodities segment in the fourth quarter of the prior year period.

Within our other operating segments, our Commercial Hedging segment was flat with the prior year, as the increase in operating revenues was partially offset by higher interest expense and an increase in variable and non-variable direct expenses.

Global Payments added $2.9 million in segment income, while the CES segment added $1.1 million versus the prior year.

These gains were partially offset by weaker performance in our Securities segment, where segment income declined $2.4 million.

While interest income in our Securities segment increased $9 million versus the prior year, that was outpaced by a $9.7 million increase in interest expense, primarily in our domestic fixed income and securities lending activities.

Slide #6, which shows the interest and fee income on our investment of client funds in our Exchange-Traded Futures & Options businesses as well as client balances held in their correspondent Clearing and Independent Wealth Management businesses.

As noted on this slide, our earnings on these balances have increased $7.4 million versus the prior year to $15.4 million, as our yield on these balances has increased 91 basis points to 2% in the current period.

The bottom of this slide shows the potential annualized interest rate sensitivity which the balances held at the end of the current period have, based upon an increase in short-term rates at various levels.

As shown, a 100 basis point increase in short-term rates has the potential to increase our net income by $16 million, or $0.84 per share on an annualized basis.

Moving on to Slide #4 (sic) [Slide #7], our quarterly financial dashboard, I would just highlight a couple of items of note.

Variable expenses represented 60.8% of our total expenses for the quarter, well above our target of keeping more than 50% of our total expenses variable in nature.

Non-variable expenses, which are made up of both fixed expenses and bad debt expense, declined $42.2 million.

However, excluding the bad debt on physical coal in the prior year period, non-variable expenses increased $4.8 million, primarily driven by higher professional fees and non-variable compensation and benefits.

We reported net income of $15.7 million in the fourth quarter, for a 12.7% return on equity, slightly below our stated target of 15%.

Finally, in closing out the review of the quarterly results, our average revenue per employee increased 14% to $580,000 on an annualized basis, and our book value per share increased $2.70 to close out the quarter at $26.72 per share.

We did not repurchase any of our common stock during the fourth quarter.

Next, I'll move on to a discussion of the year-to-date results and refer to Slide #8.

Year-to-date operating revenues were $191.8 million or 24%, to $975.8 million in fiscal 2018.

As Sean mentioned, all segments of our business reported record annual operating revenues in fiscal 2018, with the largest increase in our CES segment, which increased $72.6 million, driven by strong growth in exchange-traded volumes and interest income.

Our Securities segment added $44.5 million in operating revenues versus the prior year as a result of increases in equity capital markets volumes as well as an increase in interest income related to securities lending and domestic fixed income.

Our Commercial Hedging segment added $42.1 million in operating revenues, with Exchange-Traded revenues increasing 11%, OTC revenues increasing 22% and interest income increasing $9.5 million as compared to the prior year.

Our Global Payments and Physical Commodities segments added $10 million and $12.1 million, respectively.

Unallocated overhead revenues increased $10.5 million as a result of $5.5 million in gains on economic hedges against the Argentine peso recorded in fiscal 2018 as well as the prior year period, including a $5.8 million in unrealized losses on interest rate swaps and U.S. Treasuries held as part of our interest rate management program.

Moving on to Slide #9 for a discussion of the variance in pretax income by segment for the year-to-date period.

The largest variance was seen in our Physical Commodities segment, as a result of the bad debt on physical coal in the fourth quarter of the prior year.

The second largest increase was in our Commercial Hedging segment, which added $23.6 million in segment income, while the CES segment added $17.9 million.

Our Global Payments added $9.2 million versus the prior year.

Segment income in our Securities segment declined $5.8 million, driven by an increase in interest expense and weaker performance in our domestic and Argentinian Debt Capital Market businesses.

Finally, I will touch on the year-to-date dashboard, which is Slide #10 in the presentation deck.

Variable expenses were above our internal target of exceeding 50% of total expenses, coming in at $61.3 million -- 61.3% of total expenses.

Net income was $55.5 million for the current year-to-date period as compared to $6.4 million in the prior year.

The return on equity for the year-to-date period was 11.6%, below our 15% target, however, that was a result of tax reform.

With that, I would like to turn it back to Sean to wrap up.

Thanks, Bill.

It is clear that our core earnings have been accelerating for a number of quarters now, as we have scaled our business by increasing our capabilities and growing our client footprint, which has driven operational leverage to our bottom line and to our ROE.

Our business model offers vertically integrated execution and clearing in all major asset classes and markets for our clients.

This is a unique and increasingly valuable platform in the mid-market space because it allows clients to efficiently access many markets and asset classes through 1 provider, which is generally only available with bulge bracket banks.

This has [drawn] 5-star platform as consolidation continues and it enables us to create sticky client relationships and increased clearing and execution revenues, while also growing our client balances.

We continue to see gains in market share and attract new clients that are underserved by large global banks, capitalizing on our position as one of the few publicly-listed midsize financial service companies offering our clients futures and option products through a well-capitalized independent FCM, structured products through our swap dealer and broker dealer.

Management's emphasis is to remain laser focused on our goal of becoming a best-in-class financial franchise by doing the following: adding products and capabilities, either organically or through disciplined acquisition, to make us a counterparty of choice for commercial and institutional clients looking to access markets with efficient execution as well as post-trade clearing, settlement and custody services; two, aggressively expanding into client segments and geographies where we are underrepresented by acquiring suitable talent through recruitment or disciplined acquisition of teams; three, improving our ability to extend our growing product and capability set by more tightly integrating our offerings, platforms, marketing strategy and client experience to make the relationship more meaningful for the clients, stickier for the company and more valuable for both of us; next, investing in client-facing technology through an efficient mix of proprietary and industry-standard platforms to better leverage our intellectual capital in driving revenue growth and providing clients with easier and more efficient access to our products and services; investing in technology to create a scalable execution and clearing infrastructure where costs per transaction are decreasing in absolute terms; also create a robust environment to dynamically allocate capital and resources to maximize long-term value for our shareholders; and lastly, continue to invest in our risk management, to assure that we achieve best in -- best risk-adjusted returns for our business.

We believe that we have made significant strides in all of these objectives over the last couple of years, as evidenced by our strong financial performance, and we are becoming increasingly recognized as the broker and counterparty of choice globally.

We are well positioned, and we are excited about the prospects ahead.

We are also very pleased to have achieved some important milestones during the 2018 year.

With that, I would like to hand back to the operator and open the question-and-answer session.

Operator?

(Operator Instructions) Our first question comes from Russell Mollen from Nine Ten Capital.

The rating of the business from S&P, at BB-, where -- is that where you guys thought it would come in at?

And where do you hope it to be -- or where would you like it to be 1 year or 3 years in the future?

Okay.

So obviously, this -- the whole ratings game is new to us.

So we went through an extensive process with BMO and they did a great job of educating us how this all works, as did the various rating agencies.

We obviously did this in anticipation of our debt offering and that was what -- that's what induced us to do this.

I think just, before I start, this -- ratings are quite complicated and I'm certainly not an expert on how the rating agencies look at all the factors, although they did trying to educate us on this.

I think the thing you should realize is what was rated was the issuer, which is our holding company entity.

So they rated both the issuer and then they rated the prospective debt issue, okay?

Now the debt issue has not happened, so that's gone away.

So we're left with the issuer rating, which is the holding company.

And bear in mind, the holding company is structurally subordinated to all of the operating entities, so it's in that context that our rating was done, right?

We would probably get a different rating -- or maybe the same, I'm not sure -- if we rated operating entities, because that's where the assets actually sit.

So there's a sort of structural subordinated issue.

And honestly, I -- we spoke to a variety of banks before we headed down this path, and we ended up with a higher rating than we anticipated.

So we were pleased with the result of the rating.

And honestly, I think, as a structurally subordinated holdco, I don't think that there will be material change to that rating upwards, and hopefully not downwards.

That would be my anticipation.

In regards to this recent events of all the natgas and this very public option group that went under, I guess, how surprised or how worried were you and are you with that whole situation?

I mean, I know you kind of gave a bunch of good detail on that in your prepared remarks, but just kind of wanted to get a little bit more.

Yes, well, as I said in my comments, in the financial markets, doing what we do, we always have to consider, and always do consider, the impact of highly improbable outlier events.

I mean, if anyone is not doing that, I think they're mistaken in our industry.

So we spend a lot of time looking at these outlier events.

And oftentimes, when we lay out kind of how we value that outlier event, we get a lot of incredulity from the clients and the front office people because they believe we're being way too conservative and that, that sequence of events could never happen.

But, as we've seen, they do happen.

So we're very cognizant.

I mean, I would say that this was something we measured.

I think the outlier event for this customer was sort of in the range of what we expected as a Black Swan event.

We looked at that outcome and we looked at 300 accounts from highly qualified people who had financial means, and we looked at the collateral pool that supported that event, and in our conclusion, that was kind of acceptable to us.

Now we think we have a strong case to collect that money.

I mean, obviously lawyers have got involved and it's become very public.

So we'll have to see how that goes.

But if we had to sort of calibrate our business to take single digits of millions outlier risk, that means that we could almost not do any business with any of our clients, all right?

So we've got to balance sort of these extreme events, the improbability that they happen, but can happen, and try and make sure that we sort of balance all of that out with a rational sort of risk-reward type approach to our business.

So this was not -- I want to be clear, this was not something that happened outside of our risk management process.

I mean, this account, we looked at, we stress test this account, it was right down the middle of our risk management process.

But we do, in our business, have to consider the massive outlier events that happen.

Probably interestingly, Russell, I don't know if you saw it, there was an article in The Wall Street Journal yesterday, which sort of made the point around natural gas that maybe it's time for the exchanges to consider upping the margin on all financial products because of the increase in volatility, and that certainly would be helpful to the industry because it sort of reduces those outlier events somewhat.

In this specific instance, we had margined these clients significantly in excess of the exchange requirements before this event unfolded.

So we had already taken preemptive action, but it's obviously really hard to go out there and require clients to put up multiples of what the exchange margins are.

But my view is the exchange should look at the margins in the light of the moves that happen, and if the market's moving occasionally at multiples of what the exchange margin is, the exchange should reconsider the margining levels.

Anyway, I hope that answers your question.

There's a lot in there, but...

Yes, makes a lot of sense.

(Operator Instructions) I'm not showing any additional questions.

I would now like to turn the call back to Sean O'Connor for any closing remarks.

All right.

So thanks, everyone, for your attendance and all that leaves me to do is to wish everyone happy holidays, enjoy the family time, and we'll see you early next year.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may all disconnect.

Everyone, have a great day.