Derivative Financial Instruments and Hedging Activities

3 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging Activities

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company manages the value of certain specific assets and liabilities of its trading business, including trading inventories (see Note 6), by employing a variety of strategies. These strategies include the management of exposure to changes in the market values of the Company's trading inventories through the purchase and sale of a variety of derivative products such as metals forwards and futures.

The Company's trading inventories and purchase and sale transactions consist primarily of precious metal bearing products. The value of these assets and liabilities are linked to the prevailing price of the underlying precious metals. The Company's precious metals inventories are subject to market value changes, created by changes in the underlying commodity markets. Inventories purchased or borrowed by the Company are subject to price changes. Inventories borrowed are considered natural hedges, since changes in value of the metal held are offset by the obligation to return the metal to the supplier.

Open purchase and sale commitments are subject to changes in value between the date the purchase or sale price is fixed (the "trade date") and the date the metal is received or delivered (the "settlement date"). The Company seeks to minimize the effect of price changes of the underlying commodity through the use of forward and futures contracts.

The Company's policy is to substantially hedge its inventory position, net of open purchase and sales commitments that is subject to price risk. The Company regularly enters into metals commodity forward and futures contracts with major financial institutions to hedge price changes that would cause changes in the value of its physical metals positions and purchase commitments and sale commitments. The Company has access to all of the precious metals markets, allowing it to place hedges. However, the Company also maintains relationships with major market makers in every major precious metals dealing center.

Due to the nature of the Company's global hedging strategy, the Company is not using hedge accounting as defined under ASC 815, Derivatives and Hedging. Gains or losses resulting from the Company's futures and forward contracts are reported as unrealized gains or losses on commodity contracts with the related unrealized amounts due from or to counterparties reflected as a derivative asset or liability (see Notes 5 and 8). Gains or losses resulting from the termination of hedge contracts are reported as realized gains or losses on commodity contracts. Realized and unrealized net gains(losses) on derivative instruments in the condensed consolidated statements of operations for the three months ended September 30, 2013 and 2012 were $(17.6) million and $20.2 million, respectively, and recorded to cost of goods sold.

The Company’s management sets credit and position risk limits. These limits include gross position limits for counterparties engaged in purchase and sales transactions with the Company. They also include collateral limits for different types of purchase and sale transactions that counterparties may engage in from time to time.

A summary of the market values of the Company’s physical inventory positions, purchase and sale commitments, and its outstanding forward and futures contracts is as follows at September 30, 2013 and at June 30, 2013:



in thousands	September 30, 2013			June 30, 2013
Trading Inventory, net	$	175,367		$	162,378
Less unhedgable inventory:
Premium on metals position	(4,824		)	(1,787		)
Subtotal	170,543			160,591
Commitments at market:
Open inventory purchase commitments	352,850			461,883
Open inventory sale commitments	(133,218		)	(272,044		)
Margin sale commitments	(15,163		)	(13,651		)
In-transit inventory no longer subject to market risk	(9,872		)	(24,221		)
Unhedgable premiums on open commitment positions	2,459			2,107
Inventory borrowed from suppliers	(13,308		)	(20,117		)
Product financing obligation	(45,456		)	(38,554		)
Advances on industrial metals	(1,225		)	33
Inventory subject to price risk	307,610			256,027
Inventory subject to derivative financial instruments:
Precious metals forward contracts at market values	162,843			84,999
Precious metals futures contracts at market values	147,022			171,272
Total market value of derivative financial instruments	309,865			256,271
Net inventory subject to price risk	$	(2,255	)	$	(244	)



in thousands	September 30, 2013			June 30, 2013
Effects of open related party transactions between A-Mark and affiliates:
Net inventory subject to price risk, Company consolidated basis	$	(2,255	)	$	(244	)
Open inventory sale commitments with affiliates	1,459			(1,402		)
Open inventory purchase commitments with affiliates	(97		)	1,282
Net inventory subject to price risk, A-Mark stand-alone basis	$	(893	)	$	(364	)

The unhedgable premium on open commitment positions is equal to total premium less hedgable premium, where the premium value is based upon a percentage of the underlying bullion value. At September 30, 2013, total premium on open commitment positions was $2.5 million, of which zero was deemed hedgable. At June 30, 2013, total premium on open commitment positions was $2.1 million, of which zero was deemed hedgable.

At September 30, 2013 and June 30, 2013, the Company had the following outstanding commitments:



in thousands	September 30, 2013			June 30, 2013

Purchase commitments	$	352,850		$	461,883
Sale commitments	(133,218		)	(272,044		)
Open forward contracts	162,843			84,999
Open futures contracts	147,022			171,272

The Company uses forward contracts and futures contracts to protect its inventories from market exposure.

At September 30, 2013 and June 30, 2013, the Company had outstanding purchase commitments of $352.9 million and $461.9 million, respectively, and outstanding sale commitments of $(133.2) million and $(272.0) million, respectively, arising in the normal course of business; purchase commitments related to open forward contracts totaling $162.8 million and $85.0 million, respectively; and purchase and sale commitments related to open futures contracts totaling $147.0 million and $171.3 million, respectively. The Company uses forward contracts and futures contracts to protect its inventories from market exposure.

At September 30, 2013 the net inventory subject to price risk of A-Mark on a stand-alone basis totaled $(0.9) million.

The difference between the market price of the underlying metal or contract and the trade amount is recorded at fair value. The Company’s open purchase and sales commitments typically settle within 2 business days, and for those commitments that do not have stated settlement dates, the Company has the right to settle the positions upon demand. Futures and forwards contracts open at September 30, 2013 are scheduled to settle within 30 days.

The Company is exposed to the risk of failure of the counterparties to its derivative contracts. Significant judgment is applied by the Company when evaluating the fair value implications. The Company regularly reviews the creditworthiness of its major counterparties and monitors its exposure to concentrations. At September 30, 2013, the Company believes its risk of counterparty default is mitigated as a result of such evaluation and the short-term duration of these arrangements.

- Definition

The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items.

+ References

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+ Details

SPECTRUM GROUP INTERNATIONAL, INC. 10-Q