StoneX Group Inc. (SNEX) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Throughout this document, unless the context otherwise requires, the terms “Company”, “we”, “us” and “our” refer to StoneX Group Inc. and its consolidated subsidiaries.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the control of the Company, including adverse changes in economic, political and market conditions, losses from our market-making and trading activities arising from counterparty failures and changes in market conditions, the loss of key personnel, the impact of increasing competition, the impact of changes in government regulation, the possibility of liabilities arising from violations of foreign, United States (“U.S.”) federal and U.S. state securities laws, the impact of changes in technology in the securities and commodities trading industries and the potential impact of public health emergencies, such as the recent 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, products 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 platforms and our team of more than 4,000 employees as of September 30, 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 this Annual Report on Form 10-K.

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. This structure allows us to efficiently serve clients in more than 180 countries and manage our large global footprint. See Segment Information for a listing of business activities performed within our reportable segments.

StoneX Group Inc. and its trade name "StoneX" carry forward the foundation established by Saul Stone in 1924 to today's modern financial services firm. Today, we provide an institutional-grade financial services ecosystem, connecting our clients to 40 derivatives exchanges, 180 foreign exchange markets, most global securities exchanges and over 18,000 over-the-counter markets via our networks of highly integrated digital platforms and experienced professionals. Our platform delivers support throughout the entire lifecycle of a transaction, from consulting and boots-on-the-ground intelligence, to efficient execution, to post-trade clearing, custody and settlement.

Current Trends Affecting the Financial Services Industry

Economic and financial market conditions, including conditions impacted by public health emergencies, such as the recent COVID-19 pandemic, the recent banking crisis (such as the closure of Silicon Valley Bank, receiverships of First Republic Bank and Signature Bank, and acquisition of Credit Suisse Group AG), and geopolitical events such as terrorism, the Israel-Hamas war and escalating tensions in the Middle East, the ongoing war between Ukraine and Russia and related sanctions imposed by the U.S. Department of Treasury and other governing bodies in countries in which we conduct business, have created significant market volatility, uncertainty and economic disruption. While increased volatility is typically a driver of increased client activity and growth in our operating revenues, longer periods of extreme volatility and dislocation in global securities, foreign exchange and commodity markets may affect our ability to establish effective offsetting positions in our principal trading and market-making activities which may expose us to trading losses. In addition, in the event that a global recession or slowdown occurs, this could lead to extended periods of low short-term interest rates and decreased volatility which could adversely affect our profitability. We also may be exposed to increased counterparty default, liquidity and credit risks with respect to our client accounts, which means if our clients experience losses in excess of the funds they have deposited with us, we may not be able to recover the negative balance from our clients. In these circumstances, we may nonetheless be required to fund positions with counterparties using our own funds, which in turn would reduce our liquidity buffers. If any of these risks materialize, our operating results or ability to conduct our business may be materially adversely affected.

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In addition, the recent COVID-19 pandemic led to increased operational and cybersecurity risks and it or similar events may again do so in the future. These risks have included, among others, increased demand on our information technology resources and systems and the increased risk of phishing and other cybersecurity attacks. In the event of a significant COVID-19 resurgence or the emergence of a similar event in the future, any failure to effectively manage these increased operational and cybersecurity demands and risks may materially adversely affect our results of operations and the ability to conduct our business. For a further discussion of cybersecurity risks, see Technology and Cybersecurity Risks below.

See “Risk Factors” in Part I, Item 1A in this Form 10-K for a discussion of other risks that may affect our financial condition and results of operations.

Executive Summary

Our fiscal 2023 was marked by the effects of heightened inflationary pressures, the tightening of monetary policy in most major markets around the world and the resulting significant increase in short term interest rates. Geopolitical uncertainty remained throughout the year, however market volatility has generally declined since the Russian invasion of the Ukraine in the prior year. Against this backdrop, we experienced a tightening of spreads across all of our products with the exception of global payments. However, through continued client engagement and onboarding, as well as expansion of our product offering we grew transactional volumes in all products, with the exception of FX/CFD contracts.

In fiscal 2023 we continued to experience strong growth in our listed derivative client balances, which increased $1,441 million to $7,137 million, while average money-market/FDIC sweep balances decreased $446 million to $1,338 million. The overall increase in client balances, combined with the significant increase in short term interest rates compared to the prior year, led to an increase in interest and fee income on client balances of $295.4 million, or 331%, to $384.7 million in the fiscal year ended September 30, 2023.

Operating revenues increased $806.7 million, or 38%, to $2,914.1 million in the fiscal year ended September 30, 2023 compared to $2,107.4 million in the fiscal year ended September 30, 2022, led by our Commercial and Institutional segments which added $170.6 million and $681.8 million, respectively, compared to the fiscal year ended September 30, 2022. Our Global Payments segments added $40.6 million, while our Retail segment experienced a $93.7 million decline, compared to the fiscal year ended September 30, 2022.

Overall segment income increased $87.8 million, or 13%, compared to the fiscal year ended September 30, 2022. The growth in segment income was led by our Commercial segment which increased $102.4 million, or 36% compared to the fiscal year ended September 30, 2022. Institutional and Global Payments segment income increased $43.3 million and $11.7 million, respectively, compared to the fiscal year ended September 30, 2022. This growth was partially tempered by a $69.6 million decline in Retail segment income compared to the fiscal year ended September 30, 2022.

The significant increase in short term interest rates during fiscal 2023 drove an increase in interest expense paid on client balances of $131.5 million, to $148.9 million, compared to the fiscal year ended September 30, 2022. Interest expense related to corporate funding purposes increased $12.8 million to $57.5 million in the fiscal year ended September 30, 2023 compared to $44.7 million in the fiscal year ended September 30, 2022.

On the expense side, we continue to focus on maintaining our variable cost model and limiting the growth of our non-variable

expenses. In fiscal 2023, variable expenses were 52% of total expenses compared to 56% in the prior year. Non-variable expenses, excluding bad debts increased $112.5 million compared to the fiscal year ended September 30, 2022, principally due to higher fixed compensation and benefits, non-trading technology and support, travel and business development, trading system and market information, and depreciation and amortization.

Net income increased $31.4 million to $238.5 million in the fiscal year ended September 30, 2023 compared to $207.1 million in the fiscal year ended September 30, 2022. Diluted earnings per share were $11.18 for the fiscal year ended September 30, 2023 compared to $10.01 in the fiscal year ended September 30, 2022.

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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 Overview

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The tables below present operating revenues disaggregated across the key products we provide to our clients and select operating data and metrics used by management in evaluating our performance, for the periods indicated.

Operating Revenues

Year Ended September 30, 2023 Compared to Year Ended September 30, 2022

Operating revenues from listed derivatives declined $14.0 million, or 3%, to $416.5 million in the fiscal year ended September 30, 2023 compared to $430.5 million in the fiscal year ended September 30, 2022, principally resulting from a 4% decline in the average rate per contract.

Operating revenues in OTC derivatives increased $23.9 million, or 11%, to $232.2 million in the fiscal year ended September 30, 2023 compared to $208.3 million in the fiscal year ended September 30, 2022. This growth was principally driven by a 20% increase in OTC contract volumes, partially offset by a 7% decline in the average rate per contract.

Operating revenue from securities transactions increased $453.6 million, or 74%, to $1,064.0 million in the fiscal year ended September 30, 2023 compared to $610.4 million in the fiscal year ended September 30, 2022. This increase was principally due to a 52% 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 interest 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 $39.3 million, or 11%, to $325.6 million in the fiscal year ended September 30, 2023 compared to $364.9 million in the three months ended September 30, 2022. This decline principally resulted from the 40% decline in RPM principally due to a tightening of spreads and a change in product mix.

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Operating revenues from FX/CFD contracts declined $77.4 million, or 23%, to $261.9 million in the fiscal year ended September 30, 2023 compared to $339.3 million in the fiscal year ended September 30, 2022, principally as a result of a 10% decline in FX/CFD contracts ADV, as well as a 12% decline in FX/CFD contracts RPM.

Operating revenues from global payments increased by $40.5 million, or 24%, to $208.3 million in the fiscal year ended September 30, 2023 compared to $167.8 million in the fiscal year ended September 30, 2022, principally as a result of an 8% increase in ADV, as well as a 14% increase in payments RPM.

Operating revenues from physical contracts increased $50.6 million, or 26%, to $244.9 million in the fiscal year ended September 30, 2023 compared to $194.3 million in the fiscal year ended September 30, 2022, principally due to increased client activity in agricultural and energy commodities, including the CDI acquisition effective October 31, 2022.

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 $295.4 million, or 331%, to $384.7 million in the fiscal year ended September 30, 2023 compared to $89.3 million in the fiscal year ended September 30, 2022, principally as a result of the impact of the significant increase in short-term interest rates, as well as a 25% increase in average client equity, which was partially offset by a 25% decline in average money market/FDIC sweep client balances.

Year Ended September 30, 2022 Compared to Year Ended September 30, 2021

Operating revenues increased $434.3 million, or 26%, to $2,107.4 million in the year ended September 30, 2022 compared to $1,673.1 million in the year ended September 30, 2021. The table above displays operating revenues disaggregated across the key products we provide to our clients.

Operating revenues derived from listed derivatives increased $42.9 million, or 11%, to $430.5 million in the year ended September 30, 2022 compared to $387.6 million in the year ended September 30, 2021, principally driven by a 10% increase in listed derivative volumes.

Operating revenues in OTC derivatives increased $64.9 million, or 45%, to $208.3 million in the year ended September 30, 2022 compared to $143.4 million in the year ended September 30, 2021. This growth was principally driven by increased client activity in agricultural and soft commodity markets which resulted in a 16% increase in OTC contract volumes, as well as a 27% increase in the average rate per contract as a result of wider spreads in FX hedging and energy and renewable fuels markets.

Operating revenue from securities transactions increased $76.8 million, or 14%, to $610.4 million in the year ended September 30, 2022 compared to $533.6 million in the year ended September 30, 2021. This increase was principally a result of a 25% increase in securities ADV driven by increased client activity in fixed income markets, which was partially offset by a 15% decline in RPM as a result of lower spreads in equity products.

Operating revenues from FX/CFD contracts increased $97.3 million, or 40%, to $339.3 million in the year ended September 30, 2022 compared to $242.0 million in the year ended September 30, 2021, principally as a result of a 25% increase in FX/CFD contracts ADV, as well as a 11% increase in FX/CFD contracts RPM, both of which were driven by heightened volatility in global financial markets.

Operating revenues from global payments increased by $34.0 million, or 25%, to $167.8 million in the year ended September 30, 2022 compared to $133.8 million in the year ended September 30, 2021, principally as a result of a 15% increase in ADV, as well as a 10% increase in payments RPM.

Operating revenues from physical contracts increased $41.7 million, or 27%, to $194.3 million in the year ended September 30, 2022 compared to $152.6 million in the year ended September 30, 2021, principally due to increased client activity in agricultural and energy commodities, as well as continued strong client demand for precious metals.

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 $63.3 million, or 243%, to $89.3 million in the year ended September 30, 2022 compared to $26.0 million in the year ended September 30, 2021, principally as a result of an increase in short term interest rates as well as increases in average client equity and average FDIC sweep client balances of 48% and 21%, respectively.

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Interest and Transactional Expenses

Year Ended September 30, 2023 Compared to Year Ended September 30, 2022

Transaction-based clearing expenses

The decrease in transaction-based clearing expense was principally due to lower ADR conversion and short-rebate fees in the Equity Capital Markets business, lower bank fees and transactional regulatory fees in the Retail Forex business, which related vendor optimization and decreased FX/CFD ADV, respectively, lower fees in the Exchange-Traded Futures & Options business, principally related to a decrease in contracts traded, and lower fees in the Global Payments business. These decreases were partially offset by higher fees in the Debt Capital Markets business, due to an increase in the ADV and higher exchange fees in the Financial Ag & Energy and LME Metals businesses, due to an increase in exchange-traded volumes. The decline in the percentage of operating revenues was principally due to the impact of the significant increase in interest income on operating revenues.

Introducing broker commissions

Introducing broker commission expense increased modestly period-over-period. Higher costs in our Physical Ag & Energy business, related to incremental expense from the CDI acquisition, effective October 31, 2022, Financial Ag & Energy, Asset Management and Global Payments businesses were partially offset by decreased expenses in our Independent Wealth Management and Retail Forex businesses, principally due to lower trading volumes and revenues. The decline in the percentage of operating revenues was principally due to the impact of the significant increase in interest income on operating revenues.

Interest expense

The increase in interest expense attributable to trading activities was principally due to the significant increase in short-term interest rates, an increase in ADV in our fixed income business, and 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.

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Year Ended September 30, 2022 Compared to Year Ended September 30, 2021

Transaction-based clearing expenses

The increase in expense was principally due to higher clearing and ADR conversion fees in the Equity Capital Markets business, higher costs related to listed derivatives within the Financial Ag & Energy and Exchange-Traded Futures & Options businesses, and higher costs in our Debt Capital Markets, Global Payments, and Retail Forex businesses due to increased average daily volumes. The decline in the percentage of operating revenues was principally due to the increase in interest income.

Introducing broker commissions

The modest decrease in introducing broker commissions was principally due to lower costs within our Financial Ag & Energy and Retail Forex businesses, partially offset by increased activity in our Exchange-Traded Futures & Options, LME Metals, Physical Ag & Energy and Global Payments businesses. The decline in the percentage of operating revenues was principally due to the increase in interest income.

Interest expense

The increase in interest expense attributable to trading activities was principally due to the increase in fixed income business activities within our Institutional segment, increased interest on client balances principally due to higher short-term rates, and increased average borrowings within our Commercial segment, along with the impact of the increases in short-term interest rates.

Net Operating Revenues

Net operating revenues is one of the key measures used by management to assess the performance of our operating segments. Net operating revenue is calculated as operating revenue less transaction-based clearing expenses, introducing broker commissions and interest expense. Transaction-based clearing expenses represent variable expenses paid to executing brokers, exchanges, clearing organizations and banks in relation to our transactional volumes. Introducing broker commissions include commission paid to non-employee third parties that have introduced clients to us. Net operating revenues represent revenues available to pay variable compensation to risk management consultants and traders and direct non-variable expenses, as well as variable and non-variable expenses of operational and administrative employees, including our executive management team.

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The table below presents net operating revenues disaggregated across the key products we provide to our clients used by management in evaluating our performance, for the periods indicated.

Compensation and Other Expenses

The following table presents a summary of expenses, other than interest and transactional expenses.

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Year Ended September 30, 2023 Compared to Year Ended September 30, 2022

Compensation and Other Expenses: Compensation and other expenses increased $118.3 million, or 10%, to $1,323.4 million in the fiscal year ended September 30, 2023 compared to $1,205.1 million in the fiscal year ended September 30, 2022.

Compensation and Benefits:

Non-variable salaries increased principally due to the increase in headcount resulting from expanding capabilities among our business lines and the CDI acquisition, 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 fiscal year ended September 30, 2023, severance costs were $14.9 million, principally related to a reorganization within the Global Payments business. During the fiscal year ended September 30, 2022, severance costs were $2.6 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, which contains stock option and restricted stock expense, increased principally due to higher employee participation in the Company’s restricted stock plan, as well as from $3.3 million in accelerated share-based compensation for employee departures related to retirements and certain business reorganizations during the fiscal year ended September 30, 2023.

Other Expenses: Other non-compensation expenses increased $44.5 million, or 11%, to $454.8 million in the fiscal year ended September 30, 2023 compared to $410.3 million in the fiscal year ended September 30, 2022.

Trading systems and market information costs increased $7.8 million, principally due to higher market information costs in the Debt Capital Markets, Retail Forex, and Financial Ag & Energy businesses.

Non-trading technology and support increased $9.2 million, principally due to higher non-trading software maintenance and support costs related to various IT systems primarily within our Core IT and other overhead departments.

Occupancy and equipment rental costs increased $4.3 million, principally due to increases in costs in London and Singapore, as well as incremental costs from the CDI acquisition.

Travel and business development increased $7.9 million, principally due to higher transportation and lodging costs across all business lines and support departments following periods of reduced travel.

Depreciation and amortization increased $6.6 million, principally due to the incremental depreciation expense from internally developed software placed into service.

Bad debt expense, net of recoveries increased $0.7 million over the prior year. During the fiscal year ended September 30, 2023, bad debt expense, net of recovery was $16.5 million, principally related to bad debt expense of $15.1 million of client receivables in the Physical Ag & Energy business, $2.3 million of client trading account deficits in our Retail FX segment, and $0.6 million in client trading account deficits in our Financial Ag & Energy business, partially offset by net recoveries of $1.4 million of client trading account deficits in our Exchange-traded Futures & Options business. During the fiscal year ended September 30, 2022, bad debt expense, net of recoveries was $15.8 million, principally related to client trading account deficits

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in our Commercial, Institutional, Retail, and Global Payments segments of $11.6 million, $1.8 million, $2.3 million, and $0.1 million, respectively.

Gain on Acquisition and Other Gains, net: The results of the fiscal year ended September 30, 2023 include a nonrecurring gain of $23.5 million related to the CDI acquisition, as well as a nonrecurring gain related to proceeds received of $2.1 million resulting from an institutional-based foreign exchange antitrust class action settlement. The results of the fiscal year ended September 30, 2022 included a nonrecurring gain related to proceeds received of $6.4 million resulting from a foreign exchange antitrust class action settlement in our Retail segment.

Provision for Taxes: Our effective income tax rate was 26% and 25% for fiscal years ended September 30, 2023 and 2022, respectively. The effective income tax rate for the fiscal years ended September 30, 2023 and 2022 was higher than the U.S. federal statutory rate of 21% due to U.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. The gain on acquisition of $23.5 million in the fiscal year ended September 30, 2023 was not taxable and reduced the effective income tax rate 1.4%.

Year Ended September 30, 2022 Compared to Year Ended September 30, 2021

Compensation and Other Expenses: Compensation and other expenses increased $205.8 million, or 21%, to $1,205.1 million in the fiscal year ended September 30, 2022 compared to $999.3 million in the fiscal year ended September 30, 2021.

Compensation and Benefits:

Non-variable salaries increased principally due to increased headcount resulting from expanded capabilities among our business lines, as well as the growth in our operational and overhead departments supporting our business growth.

Employee benefits and other compensation, excluding share-based compensation, decreased principally due to increased employee-elected deferred incentive, which was exchanged for restricted stock that is amortized over a thirty-six month period following the grant date and lower severance costs, partially offset by higher payroll, benefits, and retirement costs from the increased headcount. During the year ended September 30, 2022, severance costs were $2.6 million. During the year ended September 30, 2021, severance costs were $7.7 million, principally due to the departure of certain senior officers. Share-based compensation included stock option and restricted stock expense.

Other Expenses: Other non-compensation expenses increased $90.1 million, or 28%, to $410.3 million in the year ended September 30, 2022 compared to $320.2 million in the year ended September 30, 2021.

Trading systems and market information costs increased $7.4 million, principally due to higher costs in the Retail Forex, Debt Capital Markets, and LME Metals businesses.

Professional fees increased $13.4 million, principally due to higher legal and other consulting fees.

Non-trading technology and support increased $6.4 million, principally due to higher non-trading software implementation costs related to various IT systems.

Selling and marketing costs increased $22.0 million, principally due to increased campaigns related to our Retail Forex business, as well as costs of holding our bi-annual global sales and strategy meeting in March 2022.

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Travel and business development increased $12.4 million principally due to several business line specific development meetings, as well as increases along all business lines with the lifting of certain social distancing and travel restrictions, following periods of limited travel due to responses by governments and societies to the COVID-19 pandemic.

Depreciation and amortization increased $7.9 million, principally due to the incremental depreciation expense from internally developed software placed into service.

Other expenses increased $14.3 million, principally due to higher insurance costs, non-income taxes, non-variable direct business related costs, and non-compensation employee based expenses.

Bad debt expense, net of recoveries increased $5.4 million over the prior year. During the year ended September 30, 2022, bad debt expense, net of recovery was $15.8 million, principally related to client trading account deficits in our Commercial, Institutional, Retail, and Global Payments segments of $11.6 million, $1.8 million, $2.3 million, and $0.1 million, respectively. During the year ended September 30, 2021, bad debts, net of recoveries were $10.4 million, principally related to client trading account deficits in our Commercial, Institutional, and Retail segments of $3.4 million, $0.6 million, and $1.1 million, respectively. Additionally, we recorded bad debt expense of $5.1 million related to trade receivables with physical clients.

Gain on Acquisitions and Other Gains, net: The results of the year ended September 30, 2022 include a nonrecurring gain of $6.4 million related to a foreign exchange antitrust class action settlement received in March 2022. The results of the year ended September 30, 2021 included a gain of $3.3 million related to an adjustment to the liabilities assumed as part of the Gain acquisition initially determined values, as of August 1, 2020.

Provision for Taxes: The effective income tax rate was 25% for the years ended September 30, 2022 and 2021. The effective income tax rate for the fiscal year ended September 30, 2022 and 2021 was higher than the U.S. federal statutory rate of 21% due to U.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. The gain on acquisition of $3.3 million in the year ended September 30, 2021 was not taxable and reduced the effective income tax rate 0.5%.

Variable vs. Fixed Expenses

The table below presents our variable expenses and non-variable expenses as a percentage of total non-interest expenses for the periods indicted.

Our variable expenses include variable compensation paid to traders and risk management consultants, bonuses paid to operational, administrative, and executive employees, transaction-based clearing expenses and introducing broker commissions. We seek to make our non-interest expenses variable to the greatest extent possible, and to keep our fixed costs as low as possible.

During the fiscal year ended September 30, 2023, non-variable expenses, excluding bad debts, net of recoveries, increased $112.5 million, or 16%, compared to the fiscal year ended September 30, 2022.

During the year ended September 30, 2022, non-variable expenses, excluding bad debts, net of recoveries, increased $100.0 million, or 16%, compared to the year ended September 30, 2021.

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 more than 4,000 employees allowing us to serve clients in more than 180 countries.

Our business activities are managed as operating segments, which are our reportable segments for financial reporting purposes, as shown below.

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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 revenue is calculated as operating revenue 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, of an amount equal to revenues generated, and in some cases, revenues generated less transaction-based clearing expenses, base salaries and an overhead allocation.

Segment income is calculated as net contribution less non-variable direct segment costs. These non-variable direct expenses include trader base compensation and benefits, operational charges, trading systems and market information, professional fees, travel and business development, communications, bad debts, trade errors and direct marketing expenses.

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Total Segment Results

The following table presents summary information concerning all of our business segments on a combined basis, excluding unallocated overhead, for the periods indicated.

Year Ended September 30, 2023 Compared to Year Ended September 30, 2022

Net contribution for all of our business segments increased $151.7 million, or 14%, to $1,273.6 million in the fiscal year ended September 30, 2023 compared to $1,121.9 million in the fiscal year ended September 30, 2022. Segment income increased $87.8 million, or 13%, to $763.5 million in the fiscal year ended September 30, 2023 compared to $675.7 million in the fiscal year ended September 30, 2022.

Year Ended September 30, 2022 Compared to Year Ended September 30, 2021

Net contribution for all of our business segments increased $253.2 million, or 29%, to $1,121.9 million in the fiscal year ended September 30, 2022 compared to $868.7 million in the year ended September 30, 2021. Segment income increased $169.5 million, or 33%, to $675.7 million in the fiscal year ended September 30, 2022 compared to $506.2 million in the year ended September 30, 2021.

Commercial

We offer our commercial clients a comprehensive array of products and services, including risk management and hedging services, execution and clearing of exchange-traded and OTC products, voice brokerage, market intelligence and physical trading, as well as commodity financing and logistics services. We believe our ability to provide these high-value-added products and services differentiates us from our competitors and maximizes our ability to retain our clients.

The tables below present the financial performance, a disaggregation of operating revenues, and select operating data and metrics used by management in evaluating the performance of the Commercial segment, for the periods indicated.

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For information about the assets of this segment, see Note 22 to the Consolidated Financial Statements.

Year Ended September 30, 2023 Compared to Year Ended September 30, 2022

Operating revenues increased $170.6 million, or 25%, to $862.7 million in the fiscal year ended September 30, 2023 compared to $692.1 million in the fiscal year ended September 30, 2022. Net operating revenues increased $134.8 million, or 23%, to $721.3 million in the fiscal year ended September 30, 2023 compared to $586.5 million in the fiscal year ended September 30, 2022.

Operating revenues derived from listed derivatives declined $10.0 million, or 4%, to $230.5 million in the fiscal year ended September 30, 2023 compared to $240.5 million in the fiscal year ended September 30, 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 of Ukraine and the resulting effect on base metal commodity prices. This decline was partially offset by a 14% increase in listed derivative contract volumes compared to the prior year period.

Operating revenues derived from OTC transactions increased $23.9 million, or 11%, to $232.2 million in the fiscal year ended September 30, 2023 compared to $208.3 million in the fiscal year ended September 30, 2022. This increase was principally

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driven by a 20% increase in OTC volumes, most notably in agricultural and soft commodities, which was partially offset by a 7% decline in the average rate per contract compared to the prior year.

Operating revenues derived from physical transactions increased $52.5 million, or 29%, to $232.9 million in the fiscal year ended September 30, 2023 compared to $180.4 million in the fiscal year ended September 30, 2022, principally due to the CDI acquisition, effective October 31, 2022, as well as increased client activity in agricultural and energy commodities.

Interest and fee income earned on client balances increased $100.9 million, or 244%, to $142.2 million in the fiscal year ended September 30, 2023 compared to $41.3 million in the fiscal year ended September 30, 2022, as a result of a significant increase in short-term interest rates, which was partially offset by a 10% decrease in average client equity to $1,927 million in the fiscal year ended September 30, 2023.

Variable expenses, excluding interest, expressed as a percentage of operating revenues declined to 32% in the fiscal year ended September 30, 2023 compared to 37% in the fiscal year ended September 30, 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 $102.4 million, or 36%, to $390.7 million in the fiscal year ended September 30, 2023 compared to $288.3 million in the fiscal year ended September 30, 2022, principally due to the growth in operating revenues which was partially offset by a $27.2 million increase in non-variable direct expenses. The increase in non-variable direct expenses was primarily due to a $11.3 million increase in fixed compensation and benefits, a $4.1 million increase in bad debts, net of recoveries, a $2.9 million increase in depreciation and amortization, a $2.7 million increase in travel and business development and a $2.2 million increase in selling and marketing expense.

Year Ended September 30, 2022 Compared to Year Ended September 30, 2021

Operating revenues increased $157.3 million, or 29%, to $692.1 million in the year ended September 30, 2022 compared to $534.8 million in the year ended September 30, 2021. Net operating revenues increased $153.4 million, or 35%, to $586.5 million in the year ended September 30, 2022 compared to $433.1 million in the year ended September 30, 2021.

Operating revenues derived from listed derivatives increased $17.0 million, or 8%, to $240.5 million in the year ended September 30, 2022 compared to $223.5 million in the year ended September 30, 2021. This increase was principally driven by a 9% increase in the average rate per contract as a result of wider spreads in LME commodity markets which was partially offset by a 2% decrease in contract volumes as a result of decline in agricultural and soft commodity client volumes.

Operating revenues derived from OTC transactions increased $64.9 million, or 45%, to $208.3 million in the year ended September 30, 2022 compared to $143.4 million in the year ended September 30, 2021. This increase was driven by a 16% increase in OTC volumes, primarily in agricultural and soft commodities as well as a 27% increase in the average rate per contract as a result of wider spreads in FX hedging and energy and renewable fuels markets.

Operating revenues derived from physical transactions increased $48.2 million, or 36%, to $180.4 million in the year ended September 30, 2022 compared to $132.2 million in the year ended September 30, 2021, principally due to increased client activity in agricultural and energy commodities as well as continued strong client demand for precious metals. Operating revenues during the year ended September 30, 2022 were favorably impacted by realized gains of $1.7 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 year ended September 30, 2021 included unrealized losses on derivative positions held against physical inventories carried at the lower of cost or net realizable value of $2.2 million, and sold in subsequent quarters. In addition, the year ended September 30, 2021 included a $1.9 million loss on the liquidation of certain physical inventories of crude oil and low sulfur fuel oil as a result of quality degradation and additional costs to sell.

Interest and fee income earned on client balances increased $26.7 million, or 183%, to $41.3 million in the year ended September 30, 2022 compared to $14.6 million in the year ended September 30, 2022, as result of both a 30% increase in average client equity to $2,149 million as well as an increase in short term interest rates.

Variable expenses, excluding interest, expressed as a percentage of operating revenues declined to 37% in the year ended September 30, 2022 compared to 42% in the year ended September 30, 2021, primarily as the result of the increase in interest income.

Segment income increased $96.1 million, or 50%, to $288.3 million in the year ended September 30, 2022 compared to $192.2 million in the year ended September 30, 2021, principally driven by the growth in operating revenues which was partially offset by a $16.5 million increase in other fixed expenses and a $3.1 million increase in bad debts, net of recoveries and impairment. The increase in other fixed expenses principally related to a $4.0 million increase in shared service allocations, a $3.2 million increase in travel and business development, a $2.8 million increase in professional fees, a $1.9 million increase in insurance expense and a $1.5 million increase in selling and marketing.

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Institutional

We provide institutional clients with a complete suite of equity trading services to help them find liquidity with best execution, consistent liquidity across a robust array of fixed income products, competitive and efficient clearing and execution in all major futures and securities exchanges globally as well as prime brokerage in equities and major foreign currency pairs and swap transactions. In addition, we originate, structure and place debt instruments in the international and domestic capital markets. These instruments include asset-backed securities (primarily in Argentina) and domestic municipal securities.

The tables below present the financial performance, a disaggregation of operating revenues, and select operating data and metrics used by management in evaluating the performance of the Institutional segment, for the periods indicated.

For information about the assets of this segment, see Note 22 to the Consolidated Financial Statements.

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Year Ended September 30, 2023 Compared to Year Ended September 30, 2022

Operating revenues increased $681.8 million, or 82%, to $1,513.6 million in the fiscal year ended September 30, 2023 compared to $831.8 million in the fiscal year ended September 30, 2022. Net operating revenues increased $48.5 million, or 10%, to $532.0 million in the fiscal year ended September 30, 2023 compared to $483.5 million in the fiscal year ended September 30, 2022.

Operating revenues derived from listed derivatives declined $4.0 million, or 2%, to $186.0 million in the fiscal year ended September 30, 2023 compared to $190.0 million in the fiscal year ended September 30, 2022, principally driven by a 3% decline in listed derivative contract volumes as the average rate per contract was flat compared to the fiscal year ended September 30, 2022.

Operating revenues derived from securities transactions increased $460.2 million, or 90%, to $973.6 million in the fiscal year ended September 30, 2023 compared to $513.4 million in the fiscal year ended September 30, 2022. The ADV of securities traded increased 52%, 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 interest rates, we have amended our calculation of the 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 40% in the fiscal year ended September 30, 2023 compared to the fiscal year ended September 30, 2022, principally due to a tightening of spreads and a change in product mix.

Operating revenues derived from FX contracts increased $11.0 million, or 39%, to $39.4 million in the fiscal year ended September 30, 2023 compared to $28.4 million in the fiscal year ended September 30, 2022, primarily driven by a 8% increase in the ADV of FX contracts traded as well as a 32% 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 $193.4 million, to $239.5 million in the fiscal year ended September 30, 2023 compared to $46.1 million in the fiscal year ended September 30, 2022, principally driven by a significant increase in short-term interest rates, as well as a 47% increase in average client equity compared to the prior year period, which was partially offset by a 25% decline in average money market / FDIC sweep client balances.

As a result of the increase in short-term interest rates and the increase in the ADV, interest expense increased $644.1 million, to $758.3 million in the fiscal year ended September 30, 2023 compared to $114.2 million the fiscal year ended September 30, 2022, with interest expense directly associated with serving as an institutional dealer in fixed income securities increasing $494.4 million, interest paid to clients increasing $117.7 million and interest expense directly attributable to securities lending activities increasing $16.4 million compared to the prior year period.

Variable expenses, excluding interest, expressed as a percentage of operating revenues declined to 27% in the fiscal year ended September 30, 2023 compared to 51% in the fiscal year ended September 30, 2022, principally 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 $43.3 million, or 25%, to $217.9 million in the fiscal year ended September 30, 2023 compared to $174.6 million in the fiscal year ended September 30, 2022, primarily as a result of the increase in net operating revenues noted above, as well as a $2.1 million foreign exchange antitrust class action settlement received in our institutional foreign exchange prime brokerage business. The increase in net operating revenues was partially offset by a $15.2 million, or 13% increase in non-variable direct expenses versus the fiscal year ended September 30, 2022. The increase in non-variable direct expenses was primarily related to a $8.4 million increase in fixed compensation and benefits, a $3.8 million increase in trade systems and market information, a $2.4 million increase in non-trading technology and support, a $1.5 million increase in professional fees and a $1.9 million increase in travel and business development. These increases were partially offset by a $3.3 million positive variance in bad debts, net of recoveries compared to the fiscal year ended September 30, 2022. Segment income was also favorably impacted by a nonrecurring gain related to proceeds received of $2.1 million resulting from an institutional-based foreign exchange antitrust class action settlement.

Year Ended September 30, 2022 Compared to Year Ended September 30, 2021

Operating revenues increased $163.4 million, or 24%, to $831.8 million in the year ended September 30, 2022 compared to $668.4 million in the year ended September 30, 2021. Net operating revenues increased $64.1 million, or 15%, to $483.5 million in the year ended September 30, 2022 compared to $419.4 million in the year ended September 30, 2021.

Operating revenues derived from listed derivatives increased $25.9 million, or 16%, to $190.0 million in the year ended September 30, 2022 compared to $164.1 million in the year ended September 30, 2021, principally driven by a 13% increase in listed derivative contract volumes compared to the year ended September 30, 2021, as a result of both an increase in market volatility as well as an increase in the number of clients in this business. This was partially offset by a 1% decline in the average rate per contract in the year ended September 30, 2022 compared to the year ended September 30, 2021.

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Operating revenues derived from securities transactions increased $77.4 million, or 18%, to $513.4 million in the year ended September 30, 2022 compared to $436.0 million in the year ended September 30, 2021. The ADV of securities traded increased 25%, principally driven by increased client activity in fixed income markets and to a lesser extent equity products. The RPM traded declined 15% in the year ended September 30, 2022 compared to the year ended September 30, 2021.

Operating revenues derived from FX contracts increased $12.3 million, or 76%, to $28.4 million in the year ended September 30, 2022 compared to $16.1 million in the year ended September 30, 2021, primarily driven by a 142% increase in the ADV of FX contracts traded as a result of heightened volatility in global FX markets. The effect of the increase in ADV was partially offset by a 26% decline in the average rate per contract due to changes in product and client mix.

Finally, interest and fee income earned on client balances, which is associated with our listed derivative business, as well as our correspondent clearing and independent wealth management businesses, increased $35.9 million, or 352%, to $46.1 million in the year ended September 30, 2022 compared to $10.2 million in the year ended September 30, 2021, as result of a 62% increase in average client equity and a 21% increase in average FDIC sweep client balances 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 205% compared to the prior year, with interest expense directly associated with serving as an institutional dealer in fixed income securities increasing $52.7 million, interest paid to clients increasing $14.5 million and interest expense directly attributable to securities lending activities increasing $5.4 million compared to the prior year period.

Variable expenses, excluding interest, expressed as a percentage of operating revenues declined to 51% in the year ended September 30, 2022 compared to 55% in the year ended September 30, 2021, primarily as the result of the increase in interest income.

Segment income increased $6.9 million, or 4%, to $174.6 million in the year ended September 30, 2022 compared to $167.7 million in the year ended September 30, 2021, primarily as a result of the increase in net operating revenues noted above, which was partially offset by a $26.1 million, or 28% increase in non-variable direct expenses, excluding bad debts versus the year ended September 30, 2021. The increase in non-variable direct expenses, excluding bad debts was primarily related to a $5.2 million increase in fixed compensation and benefits, a $3.9 million increase in trade systems and market information, a $6.2 million increase in professional fees and a $3.0 million increase in travel and business development.

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Retail

We provide our retail clients around the world access to over 18,000 global financial markets, including spot foreign exchange ("forex") and CFDs, which are investment products with returns linked to the performance of underlying assets, and both financial trading and physical investment in precious metals. In addition, our independent wealth management business offers a comprehensive product suite to retail investors in the United States.

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.

The tables below reflect a disaggregation of operating revenues and select operating data and metrics used by management in evaluating performance of our Retail segment for the periods indicated.

For information about the assets of this segment, see Note 22 to the Consolidated Financial Statements.

Year Ended September 30, 2023 Compared to Year Ended September 30, 2022

Operating revenues decreased $93.7 million, or 22%, to $333.0 million in the fiscal year ended September 30, 2023 compared to $426.7 million in the fiscal year ended September 30, 2022. Net operating revenues decreased $75.6 million, or 25%, to $227.3 million in the fiscal year ended September 30, 2023 compared to $302.9 million in the fiscal year ended September 30, 2022.

Operating revenues derived from FX/CFD contracts declined $88.4 million, or 28%, to $222.5 million, primarily as a result of 11% and 18% declines in RPM and FX/CFD contracts ADV, respectively, compared to the fiscal year ended September 30, 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.

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Operating revenues derived from securities transactions, which are related to our independent wealth management activities, declined $6.6 million, or 7%, to $90.4 million in the fiscal year ended September 30, 2023 compared to $97.0 million in the fiscal year ended September 30, 2022.

Operating revenues derived from physical contracts increased $1.9 million, or 14%, to $12.0 million in the fiscal year ended September 30, 2023 compared to $13.9 million in the fiscal year ended September 30, 2022.

Interest and fee income earned on client balances increased $1.1 million, or 58%, to $3.0 million primarily as a result of an increase in short-term interest rates.

Variable expenses, excluding interest, as a percentage of operating revenues were 34% in the fiscal year ended September 30, 2023 compared to 34% in the fiscal year ended September 30, 2022.

Segment income decreased $69.6 million, or 60%, to $45.8 million in the fiscal year ended September 30, 2023 compared to $115.4 million in the fiscal year ended September 30, 2022, primarily as a result of the decline in net operating revenues noted above. Non-variable direct expenses declined $4.4 million, or 3%, compared to the fiscal year ended September 30, 2022, principally driven by a $3.3 million decline in direct selling and marketing costs. The fiscal year ended September 30, 2022 included a non-recurring $6.4 million foreign exchange antitrust class action settlement received in our Retail forex business.

Year Ended September 30, 2022 Compared to Year Ended September 30, 2021

Operating revenues increased $78.7 million, or 23%, to $426.7 million in the year ended September 30, 2022 compared to $348.0 million in the year ended September 30, 2021. Net operating revenues increased $80.5 million, or 36%, to $302.9 million in the year ended September 30, 2022 compared to $222.4 million in the year ended September 30, 2021.

Operating revenues derived from FX / CFD contracts increased $85.0 million, or 38%, to $310.9 million, primarily as a result of a 32% increase in RPM and a 3% increase in FX/CFD contracts ADV compared to the year ended September 30, 2021. These increases were principally driven by heightened volatility which results in increased client trading activity and spread capture.

Operating revenues derived from securities transactions declined $0.6 million, or 1%, to $97.0 million in the year ended September 30, 2022 compared to $97.6 million in the year ended September 30, 2021.

Operating revenues derived from physical contracts declined $6.5 million, or 32%, to $13.9 million in the year ended September 30, 2022 compared to $20.4 million in the year ended September 30, 2021, with the comparative prior year period reflecting a strong performance related to heightened client activity caused by the Covid-19 pandemic.

Interest and fee income earned on client balances increased $0.7 million, or 58%, to $1.9 million primarily as a result of an increase in short term interest rates.

Variable expenses, excluding interest, as a percentage of operating revenues were 34% in the year ended September 30, 2022 compared to 41% in the year ended September 30, 2021, with the decrease in the variable rate percentage being driven by the strong growth in operating revenues derived from FX/CFD contracts which has a lower variable rate cost base.

Segment income increased $47.6 million, or 70%, to $115.4 million in the year ended September 30, 2022 compared to $67.8 million in the year ended September 30, 2021, primarily as a result of the increase in net operating revenues noted above, as well as a $6.4 million foreign exchange antitrust class action settlement received in the year ended September 30, 2022 in our Retail forex business. Non-variable direct expenses increased $34.7 million, or 25%, compared to the year ended September 30, 2021. The increase in non-variable direct expenses, was primarily a result of a $14.9 million increase in selling and marketing expenses, a $4.1 million increase in fixed compensation and benefits, a $3.6 million increase depreciation and amortization, a $2.5 million increase in trading systems and market information, a $1.9 million increase in travel and business development and a $1.4 million increase in professional fees.

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Global Payments

We provide customized payment, technology and treasury services to banks and commercial businesses as well as charities and non-governmental and government organizations. We provide transparent pricing and offer payments services in more than 180 countries and 140 currencies, which we believe is more than any other payments solutions provider.

The tables below present the financial performance, a disaggregation of operating revenues, and select operating data and metrics used by management in evaluating the performance of the Global Payments segment for the periods indicated.

For information about the assets of this segment, see Note 22 to the Consolidated Financial Statements.

Year Ended September 30, 2023 Compared to Year Ended September 30, 2022

Operating revenues increased $40.6 million, or 24%, to $212.6 million in the fiscal year ended September 30, 2023 compared to $172.0 million in the fiscal year ended September 30, 2022. Net operating revenues increased $40.8 million, or 25%, to $203.3 million in the fiscal year ended September 30, 2023 compared to $162.5 million in the fiscal year ended September 30, 2022.

The increase in operating revenues was primarily driven by an 8% increase in the average daily volume, as well as a 14% increase in the RPM traded compared to the fiscal year ended September 30, 2022.

Variable expenses, excluding interest, expressed as a percentage of operating revenues were 23% in the fiscal year ended September 30, 2023 compared to 24% in the fiscal year ended September 30, 2022.

Segment income increased $11.7 million, or 12%, to $109.1 million in the fiscal year ended September 30, 2023 compared to $97.4 million in the fiscal year ended September 30, 2022. This increase was primarily driven by the increase in net operating revenues noted above, which was partially offset by a $21.6 million increase in non-variable direct expenses. The increase in non-variable direct expenses was primarily driven by a $17.7 million increase in fixed compensation and benefits, including

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$10.0 million in severance related to a reorganization of the business. This reorganization plan will include a decline in variable compensation and benefits as a percentage of operating revenues going forward.

Year Ended September 30, 2022 Compared to Year Ended September 30, 2021

Operating revenues increased $34.7 million, or 25%, to $172.0 million in the year ended September 30, 2022 compared to $137.3 million in the year ended September 30, 2021. Net operating revenues increased $32.6 million, or 25%, to $162.5 million in the year ended September 30, 2022 compared to $129.9 million in the year ended September 30, 2021.

The increase in operating revenues was primarily driven by a 15% increase in the average daily volume as well as a 10% increase in the RPM traded compared to the year ended September 30, 2021.

Variable expenses, excluding interest, expressed as a percentage of operating revenues were 24% in both the years ended September 30, 2022 and 2021.

Segment income increased $18.9 million, or 24%, to $97.4 million in the year ended September 30, 2022 compared to $78.5 million in the year ended September 30, 2021. This increase primarily resulted from the increase in net operating revenues, partially offset by a $8.6 million increase in non-variable direct expenses versus the prior year period, which includes a $4.2 million increase in fixed compensation and benefits, a $1.2 million increase in travel and business development and a $0.7 million increase in non-trading technology and support.

Unallocated Costs and Expenses

The following table is a breakout of our unallocated costs and expenses from the total costs and expenses shown above. The unallocated costs and expenses include certain shared services such as information technology, accounting and treasury, credit and risk, legal and compliance, and human resources and other activities.

Year Ended September 30, 2023 Compared to Year Ended September 30, 2022

Total unallocated costs and other expenses increased $61.9 million, or 18%, to $400.9 million in the fiscal year ended September 30, 2023 compared to $339.0 million in the fiscal year ended September 30, 2022. Compensation and benefits increased $45.3 million, or 25%, to $224.0 million in the fiscal year ended September 30, 2023 compared to $178.7 million in the fiscal year ended September 30, 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 non-variable compensation is partially a result of hiring among our compliance and IT departments, principally due to company growth, and within the accounting department, principally due to the CDI acquisition.

Also, the increase in non-variable compensation is related to 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. Additionally, the increase in variable compensation is principally due to higher performance, and to a lessor extent, an increase in headcount.

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Other non-compensation expenses increased $16.6 million, or 10%, to $176.9 million in the fiscal year ended September 30, 2023 compared to $160.3 million in the fiscal year ended September 30, 2022 principally due to higher occupancy costs, principally related to an increase in property tax assessments in London, non-trading technology maintenance and support costs for the various systems used by the support services departments, and travel and business development costs, partially offset by lower selling and marketing costs due principally to the bi-annual global sales and strategy meeting held in March 2022.

Year Ended September 30, 2022 Compared to Year Ended September 30, 2021

Total unallocated costs and other expenses increased $38.3 million, or 13%, to $339.0 million in the year ended September 30, 2022 compared to $300.7 million in the year ended September 30, 2021. Compensation and benefits increased $22.0 million, or 14%, to $178.7 million in the year ended September 30, 2022 compared to $156.7 million in the year ended September 30, 2021.

During the year ended September 30, 2022, the increase in variable compensation and benefits was principally related to higher incentives driven by increased company performance over the prior year. Fixed compensation and benefits increased modestly during the year ended September 30, 2022, principally due to increased headcount, partially offset by lower severance costs. During the year ended September 30, 2022, severance costs were $0.9 million. During the year ended September 30, 2021, severance costs were $3.5 million, principally due to the departure of certain corporate senior officers.

During the year ended September 30, 2022, the increase in non-trading technology and support is principally due to an increase in non-trading software licensing and maintenance costs within our IT department. During the year ended September 30, 2022, the increase in selling and marketing expenses is principally due to the costs of holding our bi-annual global sales and strategy meeting in March 2022. During the year ended September 30, 2022, the increase in travel and business development is principally due to increased travel among the support functions with the lifting of certain social distancing and travel restrictions, following periods of limited travel due to responses by governments and societies to the COVID-19 pandemic.

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.

Regulatory

StoneX Financial Inc. is registered as a broker-dealer with the SEC and is a member of both FINRA and MSRB. In addition, StoneX Financial Inc. is registered as a futures commission merchant with the CFTC and NFA, and a member of various commodities and futures exchanges in the U.S. and abroad. StoneX Financial Inc. has a responsibility to meet margin calls at all exchanges on a daily basis, and even on an intra-day basis, if deemed necessary by relevant regulators or exchanges. We require our clients to make margin deposits the next business day, and we require our largest clients to make intra-day margin payments during periods of significant price movement. Margin required to be posted to the exchanges is a function of our clients’ net open positions and required margin per contract. StoneX Financial Inc. is subject to minimum capital requirements under Section 4(f)(b) of the Commodity Exchange Act, Part 1.17 of the rules and regulations of the CFTC and the SEC Uniform Net Capital Rule 15c3-1 under the Securities Exchange Act of 1934. StoneX Financial Inc. is also subject to Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (“Customer Protection Rule”).

Gain Capital Group, LLC is registered as both a futures commission merchant and registered foreign exchange dealer, subject to minimum capital requirements under Section 4(f)(b) of the Commodity Exchange Act, Part 1.17 of the rules and regulations of the CFTC and NFA Financial Requirements, Sections 1 and 11.

StoneX Markets LLC is a CFTC registered swap dealer, whose business is overseen by the NFA. The CFTC imposes rules over net capital requirements, as well as the exchange of initial margin between registered swap dealers and certain counterparties.

These rules specify the minimum amount of capital that must be available to support our clients’ account balances and open trading positions, including the amount of assets that StoneX Financial Inc., Gain Capital Group, LLC and StoneX Markets LLC must maintain in relatively liquid form. Further, the rules are designed to maintain general financial integrity and liquidity.

StoneX Financial Ltd is regulated by the FCA, the regulator of investment firms in the U.K. as a MiFID investment firm under U.K. law, and is subject to regulations which impose regulatory capital requirements. In Europe, our regulated subsidiaries are subject to E.U. regulation. Across the U.K. and E.U., the respective transpositions of the Market Abuse Regulation, and the

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General Data Protection Regulation, also apply. StoneX Financial Ltd is a member of various commodities and futures exchanges in the U.K. and Europe and has the responsibility to meet margin calls at all exchanges on a daily basis and intra-day basis, as necessary. StoneX Financial Ltd is required to be compliant with the U.K.’s ‘MIFIDPRU’ regulation. To comply with these standards, we have implemented daily liquidity procedures, conduct periodic reviews of liquidity by stressed scenarios, and are required to maintain enough liquidity for the firm to survive for one year under the appropriate stressed conditions.

The regulations discussed above limit funds available for dividends to us. As a result, we may be unable to access our operating subsidiaries’ funds when we need them.

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 September 30, 2023, we had total equity of $1,379.1 million, outstanding loans under revolving credit and other facilities of $341.0 million and $342.1 million outstanding on our senior secured notes, net of deferred financing costs.

A substantial portion of our assets are liquid. As of September 30, 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.

As of September 30, 2023, we had deferred tax assets totaling $45.4 million. We are required to assess the need for deferred tax asset valuation allowances at each reporting period. We record a valuation allowance against deferred tax assets when it is considered more likely than not that we will not realize all or a portion of our deferred tax assets. The valuation allowance for deferred tax assets as of September 30, 2023 and 2022 was $12.4 million and $15.8 million, respectively. The valuation allowances as of September 30, 2023 and 2022 were primarily related to U.S. state and local, and foreign net operating loss carryforwards and foreign tax credits that, in the judgment of management, are not more likely than not to be realized.

Client and Counterparty Credit and Liquidity Risk

Our operations expose us to credit risk related to 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.

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We enter into securities purchased under agreements to resell, securities sold under agreements to repurchase, securities borrowed and securities loaned transactions to, among other things, finance financial instruments, acquire securities to cover short positions, acquire securities for settlement, and to accommodate counterparties’ needs. In connection with these agreements and transactions, it is our policy to receive or pledge cash or securities to adequately collateralize such agreements and transactions in accordance with general industry guidelines and practices. The collateral is valued daily and we may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.

OptionSellers

In November 2018, balances in approximately 300 accounts of the FCM division of our wholly owned subsidiary, StoneX Financial Inc., declined below required maintenance margin levels and into deficit balances. All positions in these accounts, which were managed by OptionSellers.com Inc. (“OptionSellers”), an independent Commodity Trading Advisor (“CTA”), were liquidated in accordance with StoneX Financial Inc.’s client agreements and obligations under market regulation standards.  As of September 30, 2023, the receivable from these client accounts, net of collections and other allowable deductions was $17.2 million, with no individual account receivable exceeding $1.4 million. As of September 30, 2023, the allowance against these uncollected balances was $5.1 million. The Company is pursuing collection of the uncollected balances through arbitration proceedings against the account holders. The Company will consider developments in these proceedings, and any other relevant matters, in determining whether any changes in the allowance against the uncollected balances are required.

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. Additional information on this matter can be found in Note 13 of the Consolidated Financial Statements.

Primary Sources and Uses of Cash

Our cash and cash equivalents and client cash and securities held for clients are held at banks, deposits at liquidity providers, investments in money market funds that invest in highly liquid investment grade securities including U.S. treasury bills, as well as investments in U.S treasury bills. In general, we believe all of our investments and deposits are of high credit quality and we have more than adequate liquidity to conduct our businesses.

Our assets and liabilities may vary significantly from period to period due to changing client requirements, economic and market conditions and our growth. Our total assets as of September 30, 2023 and 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. Certain of our subsidiaries 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 StoneX Financial Inc., StoneX Financial Ltd, StoneX Markets LLC, and Gain Capital Group, LLC are restricted from being transferred to us or other affiliates due to specific regulatory requirements. This restriction has no current impact on our ability to meet our cash obligations, and no such impact is expected in the future.

We have liquidity and funding policies and processes in place that are intended to maintain sufficient flexibility to address both company-specific and industry liquidity needs. The majority of our excess funds is held with high-quality institutions, under highly liquid reverse repurchase agreements, U.S. government obligations, interest earning cash deposits and AA-rated money market investments.

We do not intend to distribute earnings of our foreign subsidiaries in a taxable manner, and therefore intend to limit distributions to earnings previously taxed in the U.S., or earnings that would qualify for the 100 percent dividends received deduction, and earnings that would not result in any significant foreign taxes. We repatriated $35.5 million and $29.7 million for the fiscal years ended September 30, 2023 and 2022, respectively, of earnings previously taxed in the U.S. resulting in no significant incremental taxes. Therefore, the Company has not recognized a deferred tax liability on its investment in foreign subsidiaries.

Senior Secured Notes

In June 2020, we issued $350.0 million in aggregate principal amount of our 8.625% Senior Secured Notes due 2025 (the “Notes”) at the offering price of 98.5% of the aggregate principal amount. The Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior second lien secured basis, by certain subsidiaries of the Company that guarantee the Company’s senior committed credit facility and certain of its domestic subsidiaries.

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The Notes will mature on June 15, 2025. Interest on the Notes accrues at a rate of 8.625% per annum and is payable semiannually in arrears on June 15 and December 15 of each year. We incurred debt issuance costs of $9.5 million in connection with the issuance of the Notes, which are being amortized over the term of the Notes under the effective interest method. We have had the right, since June 15, 2022, to redeem the Notes, in whole or in part, at the redemption prices set forth in the indenture.

Committed Credit Facilities

As of September 30, 2023, we had five committed bank credit facilities, totaling $1,200.0 million, of which $278.0 million was outstanding. Additional information regarding our bank credit facilities can be found in Note 11 of the Consolidated Financial Statements. The credit facilities include:

•A first-lien senior secured syndicated loan facility under which $500.0 million is available to us for general working capital requirements and capital expenditures. The revolving credit facility was amended during the year ended September 30, 2023 to increase the amount available and extend the maturity date to April 21, 2026. The maturity date remains April 21, 2025 for one lender representing $42.5 million of the facility commitment.

•An unsecured line of credit committed until October 29, 2024, under which $190.0 million is available to our wholly owned subsidiary, StoneX Financial Inc. to provide short term funding of margin to commodity exchanges as necessary.

•A syndicated borrowing facility committed until July 28, 2024, under which $400.0 million is available to our wholly owned subsidiary, StoneX Commodity Solutions LLC (“StoneX Commodity Solutions”) to finance commodity financing arrangements and commodity repurchase agreements.

•An unsecured syndicated loan facility committed until October 12, 2024, under which our subsidiary, StoneX Financial Ltd is entitled to borrow up to $100.0 million, subject to certain terms and conditions of the credit agreement. This facility is intended to provide short-term funding of margin to commodity exchanges as necessary.

•An unsecured revolving credit facility committed until September 6, 2024, under which $10.0 million is available to our wholly owned subsidiary, StoneX Financial Pte. Ltd. for general working capital requirements.

Our facility agreements contain certain financial covenants relating to financial measures on a consolidated basis, as well as on a stand-alone subsidiary basis, in certain cases, including minimum tangible net worth, minimum regulatory capital, minimum net unencumbered liquid assets, maximum net loss, minimum fixed charge coverage ratio and maximum funded debt to net worth ratio. Failure to comply with any such covenants could result in the debt becoming payable on demand. As of September 30, 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 first-lien senior secured syndicated revolving loan facility, during the trailing twelve months ended September 30, 2023, interest expense directly attributable to trading activities includes $556.7 million in connection with trading activities conducted as an institutional dealer in fixed income securities, and $39.4 million in connection with securities lending activities.

As reflected above, $410.0 million of the Company’s committed credit facilities are scheduled to expire during the upcoming year. The Company intends to renew or replace all of its facilities as they expire over time, 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 September 30, 2023 and September 30, 2022, the Company had $55.5 million and $0.0 million total borrowings outstanding under these uncommitted credit facilities, respectively.

Other Capital Considerations

Our activities are subject to various significant governmental regulations and capital adequacy requirements, both in the U.S. and in the international jurisdictions in which we operate. Our subsidiaries are in compliance with all of their capital regulatory requirements as of September 30, 2023. Additional information on our subsidiaries subject to significant net capital and minimum net capital requirements can be found in Note 21 of the Consolidated Financial Statements.

Our subsidiary, StoneX Markets LLC, is a CFTC registered swap dealer, and under these capital rules is subject to a minimum regulatory capital requirement. StoneX Markets 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

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6.5% of its risk weighted assets (“RWA”); (iii) CET1, Additional Tier 1, and Tier 2 (collectively, total aggregate Bank Holding Company (“BHC”) capital) equal to at least 8% of its RWA; (iv) total aggregate BHC capital equal to 8% of its uncleared swap margin; and (v) the minimum capital required by NFA. Aggregate BHC capital and the related net capital requirement may fluctuate on a daily basis.

Compliance with this or other swap-related regulatory capital requirements may require us to devote more capital to these businesses or otherwise restructure our operations, such as by combining these businesses with other regulated subsidiaries that must also satisfy regulatory capital requirements. StoneX Markets LLC has faced, and may continue to face, increased costs due to the registration and regulatory requirements listed above, as may any other of our subsidiaries that may be required to register, or may register voluntarily, as a swap dealer and/or swap execution facility.

Cash Flows

We include client cash and securities that meet the short term requirement for cash classification to be segregated for regulatory purposes in our consolidated statements of cash flows. We hold a significant amount of U.S. Treasury obligations which represent investment of client funds or client-owned investments pledged in lieu of cash margin. U.S. Treasury securities held with third-party banks or pledged with exchange-clearing organizations representing investments of client funds or which are held for particular clients in lieu of cash margin are included in the beginning and ending cash balances reconciled on our consolidated statements of cash flows to the extent that they have an original or acquired maturity of 90 days or less and, therefore, meet the definition of a segregated cash equivalent. Purchases and sales of U.S. Treasury securities representing investment of clients’ funds and U.S. Treasury securities pledged or redeemed by particular clients in lieu of cash margin are presented as operating uses and sources of cash, respectively, within the operating section of the consolidated statements of cash flows if they have an original or acquired maturity of greater than 90 days. Typically, there is an offsetting use or source of cash related to the change in the payables to clients. However, we will report a use of cash in periods where segregated U.S. Treasury securities that meet the aforementioned definition of a segregated cash equivalent mature and are replaced with U.S. Treasury securities that have original or acquired maturities that are greater than 90 days.

Our cash, segregated cash, cash equivalents, and segregated cash equivalents decreased from $6,285.1 million as of September 30, 2022 to $6,041.7 million as of September 30, 2023, a net decrease of $243.4 million. Net cash of $23.7 million was used in operating activities, including movements typical of our operations, with large changes coming from financial instruments owned, payable to broker dealers, funds with broker dealers and clearing organizations, as well as securities purchased and securities sold.

Net cash used in financing activities during the fiscal year ended September 30, 2023 included significant outflows from payables to lenders under 90 days of $119.3 million, net outflows from payables to lenders greater than 90 days of $35.0 million and payments of deferred acquisitions costs of $18.7 million. Also, we received $3.7 million related to employee stock option exercises. We did not repurchase any of our outstanding common stock during the years ended September 30, 2023 and September 30, 2022.

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 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 include $46.9 million in capital expenditures for property and equipment during the fiscal year ended September 30, 2023 compared to $49.5 million during the fiscal year ended September 30, 2022 and $62.1 million during the fiscal year ended September 30, 2021. Capital expenditures over the past three years have primarily included software development, core information technology hardware acquisitions, and leasehold improvements on office space.

Investing activities also include $6.1 million in cash payments for the acquisition of businesses during the fiscal year ended September 30, 2023 compared to $0.2 million during the fiscal year ended September 30, 2022 and $2.4 million during the

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fiscal year ended September 30, 2021. Further information about business acquisitions is contained in Note 20 to the Consolidated Financial Statements. These amounts were offset by smaller inflows related to sales of equipment and exchange membership stock, mainly in the year ended September 30, 2021.

On August 30, 2023, 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 on October 1, 2023 and ending on September 30, 2024. The repurchases are subject to the discretion of the senior management team to implement our stock repurchase plan, and subject to market conditions and as permitted by securities laws and other legal, regulatory and contractual requirements and covenants.

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.

Contractual Obligations

The following table summarizes our cash payment obligations as of September 30, 2023:

(1) Represents an estimate of contractual purchase commitments in the ordinary course of business primarily for the purchase of precious metals and agricultural and energy commodities. Unpriced contract commitments have been estimated using September 30, 2023 fair values. The purchase commitments for less than one year will be partially offset by corresponding sales commitments of $5,689.0 million.

Total contractual obligations exclude defined benefit pension obligations. We comply with the minimum funding requirements, and accordingly contributed $0.1 million to our defined benefit pension plans during the year ended September 30, 2023. During the year ending September 30, 2024, we anticipate making future benefit payments of $2.1 million related to the defined benefit plans. Additional information on the funded status of these plans can be found in Note 17 of the Consolidated Financial Statements.

Based upon our current operations, we believe that cash flow from operations, available cash and available borrowings under our credit facilities will be adequate to meet our future liquidity needs.

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 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

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clearing organization requirements and internal guidelines. We monitor required margin levels daily and, therefore, may require clients to deposit additional collateral or reduce positions when necessary. We also establish contract limits for clients, which are monitored daily. We evaluate each client’s creditworthiness on a case-by-case basis. Clearing, financing, and settlement activities may require us to maintain funds with or pledge securities as collateral with other financial institutions. Generally, these exposures to exchanges are subject to netting of open positions and collateral, while exposures to clients are subject to netting, per the terms of the client agreements, which reduce the exposure to us by permitting receivables and payables with such clients to be offset in the event of a client default. Management believes that the margin deposits held 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 in U.S. Treasury obligations, U.S. government agency obligations, agency mortgage-backed obligations, and asset-backed obligations, we are engaged in various securities trading, borrowing and lending activities serving solely institutional counterparties. Our exposure to credit risk associated with the nonperformance of counterparties in fulfilling their contractual obligations pursuant to these securities transactions and market risk associated with the sale of securities not yet purchased can be directly impacted by volatile trading markets which may impair their ability to satisfy outstanding obligations to us. In the event of non-performance and unfavorable market price movements, we may be required to purchase or sell financial instruments, which may result in a loss to us.

We transact OTC and foreign exchange contracts with our clients, and our OTC and foreign exchange trade desks will generally offset the client’s transaction simultaneously with one of our trading counterparties or will offset that transaction with a similar, but not identical, position on the exchange. These unmatched transactions are intended to be short-term in nature and are conducted to facilitate the most effective transaction for our client.

Additionally, we hold options and futures on options contracts resulting from market-making and proprietary trading activities in these product lines. We assist clients in our commodities trading business to protect the value of their future production (precious or base metals) by selling them put options on an OTC basis. We also provide our physical commodities trading business clients with sophisticated option products, including combinations of buying and selling puts and calls. We mitigate our risk by effecting offsetting options with market counterparties or through the purchase or sale of exchange-traded commodities futures. The risk mitigation of offsetting options is not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC.

As part of the activities discussed above, we carry short positions. We sell financial instruments that we do not own, borrow the financial instruments to make good delivery, and therefore are obliged to purchase such financial instruments at a future date in order to return the borrowed financial instruments. We record these obligations in the consolidated financial statements as of September 30, 2023 and 2022, at fair value of the related financial instruments, totaling $3,085.6 million and $2,469.6 million, respectively. These positions are held to offset the risks related to financial assets owned, and reported in our Consolidated Balance Sheets in Financial instruments owned, at fair value, and Physical commodities inventory, net. We will incur losses if the fair value of the Financial instruments sold, not yet purchased, increases subsequent to September 30, 2023, which might be partially or wholly offset by gains in the value of assets held as of September 30, 2023. The totals of $3,085.6 million and $2,469.6 million include a net liability of $288.3 million and $384.0 million for derivatives, based on their fair value as of September 30, 2023 and 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 Consolidated Balance Sheets as of September 30, 2023 and 2022.

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Effects of Inflation

Increases in our expenses, such as compensation and benefits, transaction-based clearing expenses, occupancy and equipment rental, may result from inflation, which may not be readily recoverable from increasing the prices of our services. While rising interest rates are generally favorable for us, to the extent that inflation has other adverse effects on the financial markets and on the value of the financial instruments held in inventory, it may adversely affect our financial position and results of operations.

Critical Accounting Policies

Preparing consolidated financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions affecting reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, as well as the recorded amounts of revenue and expenses during the reported period. The accounting policies discussed in this section are those that we consider the most critical to the financial statements. Therefore, understanding these policies is important to understanding our reported and potential future results of operations and financial position.

Valuation of Financial Instruments and Foreign Currencies

Description

Substantially all financial instruments are reflected in the consolidated financial statements at fair value, or amounts that approximate fair value due to their short-term nature or level of collateralization. These financial instruments include: cash and cash equivalents; cash, securities and other assets segregated under federal and other regulations; securities purchased under agreements to resell; securities borrowed; deposits with and receivables from broker-dealers, clearing organizations, and counterparties; financial instruments owned; securities sold under agreements to repurchase; securities loaned; and financial instruments sold, but not yet purchased. Unrealized gains and losses related to these financial instruments, when we are principal to the transaction, are reflected in earnings.

Foreign currency translation is an estimate critical to consolidating in our reporting currency. The value of certain assets and liabilities denominated in foreign currencies, including foreign currencies sold, not yet purchased, are converted into their U.S. dollar equivalents at the foreign exchange rates in effect at the close of business at the end of the accounting period. For foreign currency transactions completed during each reporting period, the relevant exchange rate at the time is used before translation into U.S. dollar equivalent for consolidated reporting.

Judgment and Uncertainties

At each period end, using professional judgment and industry expertise, we select fair values for financial instruments. Where available, we price from independent sources such as listed market prices, third-party pricing services, or broker dealer price quotations. We use fair values derived from pricing models that consider current market and contractual prices for the underlying financial instruments or commodities, as well as time value and yield curve or volatility factors underlying the positions. In some cases, even though the value of a security is derived from an independent market price, or broker or dealer quote, we may need to make certain assumptions to determine the fair value.

Effect if Actual Results Differ From Assumptions

Our valuation assumptions may be incorrect, and the actual value realized upon closing any position could be different from estimated carrying value, because of changes in prices, assumptions, or the overall business environment. We believe that the likelihood that of such an outcome is low and, if it should be the case, it is likely to not be significant. This view is supported by a few key factors:

•Valuations for substantially all of the financial instruments, most of which are in highly liquid markets, are available from independent, well-known publishers of market information.

•We have robust controls and procedures surrounding pricing and our various technologies involved in it.

•The relevant positions are generally short-term in nature.

•The Company holds positions in a wide range of products, such that an error in a limited number of prices is unlikely to cause a significant change to the overall result and pricing issues in a wide array of products is very unlikely.

Revenue Recognition

Description

A significant portion of our revenues are derived principally, from realized and unrealized trading income in securities, derivative instruments, commodities and foreign currencies purchased or sold for our account. We record realized and unrealized trading income on a trade date basis. We state financial instruments owned and financial instruments sold, not yet purchased and foreign currencies sold, not yet purchased, at fair value with related changes in unrealized appreciation or

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depreciation reflected in Principal gains, net in the Consolidated Income Statements. We record fee and interest income on the accrual basis and dividend income is recognized on the ex-dividend date.

A substantial amount of our revenues derive from Commission and clearing fees. These revenue types involve less complexity than Principal gains, net would, as, generally, we are an agent in the underlying transactions. We recognize revenues on a trade date basis for the transactions, as, typically, our obligation is met at that point and there are no future obligations to consider.

We recognize revenue on commodities that are purchased for physical delivery to clients when we meet our obligations to our clients and in an amount equal to the consideration we expect to receive at that point in time.

Judgment and Uncertainties

Judgments, outside of the valuation considerations previously discussed, relate to the timing and appropriateness of revenue recognition and whether we have fulfilled our performance obligations.

Effect if Actual Results Differ From Assumptions

If we misapply the relevant guidance or incorrectly recognize revenue that we have not earned, earnings may be misstated. We do not believe that such a possibility is reasonably likely, because we have developed systems and controls for each of our businesses to capture all known transactions in the appropriate reporting period. In addition, the overwhelming majority of our revenue is recognized upon trade consummation, as we satisfy our performance obligations, and we do not need to estimate when that may have occurred.

Income Taxes

Description

We are subject to income taxes in the U.S. and numerous foreign jurisdictions.

Judgment and Uncertainties

Judgment is required in determining the consolidated income taxes and in evaluating tax positions, including evaluating income tax uncertainties. As a result, the company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due. We do not currently have any uncertain tax positions.

Income taxes are accounted for under the asset and liability method, recognizing the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled, with any change in tax rates recognized in income in the period that includes the enactment date. Management considers all relevant evidence for each jurisdiction to determine valuation allowances. If we change our determination as to the amount of deferred tax assets we expect to realize, we adjust our valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.

Effect if Actual Results Differ From Assumptions

We believe that our accruals for tax liabilities are adequate for all open audit years. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. To the extent circumstances arise requiring us to change our judgment regarding the adequacy of existing tax accounts, we do not believe such a change is likely to be material to our financial statements. The tax accounts in total are relatively immaterial to the balance sheet, which, when combined with their likelihood of being misstated, particularly our valuation allowances given our positive earnings trend in recent years, results in a generally insignificant risk to us.

Accounting Standards Update

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities from acquired contracts using the revenue recognition guidance under Accounting Standards Codification Topic 606, Revenue from Contacts with Customers, in order to recognize contract liabilities in alignment with the definition of performance obligations. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, which means that it will be effective for our fiscal year beginning October 1, 2023. Early adoption is permitted. We do not believe that adoption of ASU 2021-08 will have a significant impact on our consolidated financial statements. We do not expect any other recently issued accounting pronouncements to have a significant effect on our financial statements.

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