LOM 2023 Annual Report - Report - Page 51
LOM
2021 ANNUAL REPORT
13. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE
SHEET RISK
Client Activities
In the normal course of business, the Company’s client
activities include execution, settlement, and financing of
various client securities and commodities transactions. These
activities may expose the Company to off-balance sheet risk in
the event the client is unable to fulfill its contractual obligations
and the Company has to sell the financial instrument underlying
the contract at a loss. The Company attempts to mitigate this
risk by adhering to strict policies requiring client acceptance
procedures prior to the execution of any transactions.
The Company’s client securities activities are transacted on
either a cash or margin basis. In margin transactions, the
Company extends credit to the client collateralized by cash
and securities in the client’s account. The Company seeks to
control the risks associated with its client activities by requiring
clients to maintain margin collateral in compliance with various
regulatory, exchange, and internal guidelines. The Company
monitors required margin levels daily and, pursuant to such
guidelines, requires the clients to deposit additional collateral
or reduce positions when necessary.
Such transactions may expose the Company to significant offbalance sheet risk in the event the margin is not sufficient to
fully cover losses which clients may incur.
In the event the client fails to satisfy its obligations, the
Company may be required to purchase or sell the collateral at
prevailing market prices in order to fulfill the client’s obligations.
The Company records client transactions on a transaction date
basis, which is generally the day of the trade. The Company
is therefore exposed to risk of loss on these transactions in
the event of the client’s or broker’s inability to meet the terms
of their contracts in which case the Company may have to
purchase or sell financial instruments at prevailing market
prices.
Counterparty Risk
In the event counterparties to the transactions do not fulfill
their obligations, the Company may be exposed to significant
credit risk to the extent such obligations are unsecured.
The Company’s policy is to monitor its market exposure and
counterparty risk through the use of a variety of credit exposure
reporting and control procedures.
Legal Proceedings
From time to time, the Company is involved in various legal
proceedings, including arbitration proceedings, and/or
regulatory inquiries that arise in the normal course of business.
These matters generally relate to specific client accounts and/
or transactions and may include requests for information on or
from officers of the Company. In the opinion of management,
the aggregate amount of any potential liability arising from
such matters is not expected to have a material effect on
the Company’s financial position or results of operations.
Management is unaware of any outstanding legal claims.
Regulatory Restrictions
The Company’s business operations are strictly regulated under
the laws of Bermuda and Bahamas, and other jurisdictions
that the Company operates and has business relationships.
Compliance with many of the regulations applicable to the
Company involves a number of risks, particularly in areas
where applicable regulations may be subject to interpretation.
In the event of non-compliance with an applicable regulation,
securities regulators may institute administrative or judicial
proceedings that may result in censure, fines, civil penalties,
issuance of cease-and-desist orders, deregistration or
suspension of the non-compliant company. It could even lead
to the suspension or disqualification of the Company officers or
employees, or other adverse consequences. The imposition of
such penalties or orders on the Company could in turn have a
material adverse effect on the Company’s operating results and
financial condition.
Minimum Regulatory Capital
Certain subsidiaries of the Company are required to maintain
a regulatory capital amount to satisfy the domiciliary regulator.
Those minimum amounts are as follows:
LOM Financial (Bermuda) Limited
LOM Asset Management Limited
Global Custody and Clearing Limited
LOM Financial (Bahamas) Limited
$250,000
$250,000
$250,000
$300,000
As of December 31, 2021 and 2020, the above subsidiaries
met their minimum regulatory capital amount.
Futures Contracts
Futures contracts provide reduced counterparty risk to
the Company since futures are exchange- traded; and the
exchange’s clearinghouse, as the counterparty to all exchangetraded futures, guarantees the futures against default. For
futures contracts where the Company takes a short position, a
gain, limited to the original fair value of the contract, or a loss,
unlimited in size, will be recognized upon the termination of the
futures contract. Short futures contracts represent obligations
of the Company to deliver specified securities or commodities
at contracted prices and thereby create a liability to repurchase
the securities or commodity in the market at prevailing prices.
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