Receivables from customers and notes receivable, net

On June 30, 2011, the commodities market experienced downward limit price movements on certain commodities, and as a result, certain exchange-traded derivative contracts, which would normally be valued using quoted market prices were priced using a valuation model - see Note 6. These market events caused an increase in receivables from customers related to margin balances as of the balance sheet date. The Company has subsequently collected all margin balances from its customers related to these market events.

Receivables from customers, net and notes receivable, net include a provision for bad debts, which reflects our best estimate of probable losses inherent in the receivables from customers and notes receivable. The Company provides for an allowance for doubtful accounts based on a specific-identification basis. The Company continually reviews its provision for bad debts. The allowance for doubtful accounts related to receivables from customers is $12.1 million and $4.9 million at June 30, 2011 and September 30, 2010, respectively. The allowance for doubtful accounts related to total notes receivable was $0.1 million at June 30, 2011, and $114.3 million at September 30, 2010.

During the three and nine months ended June 30, 2011, the Company recorded bad debt expense, net of recoveries, of $1.2 million and $4.0 million, respectively. During the three and nine months ended June 30, 2011, increases to the allowance for doubtful accounts were $3.0 million and $7.5 million, respectively. The current provision increase was primarily related to an additional loss recognized on a customer to whom the Company had consigned gold, in the C&RM segment, for which a partial provision was recorded during the fourth quarter of fiscal 2010. During the three months ended June 30, 2011, negotiation efforts with the customer to partially settle the loss were unsuccessful, resulting in legal proceedings against the customer, and a charge to bad debt expense for the remainder of the loss in the amount of $2.7 million. During the nine months ended June 30, 2011, the provision increase also included amounts for another customer to whom the Company had consigned gold, in the C&RM segment, and a clearing customer deficit account in the CES segment. During the three and nine months ended June 30, 2011, the Company recorded recoveries of $1.8 million and $3.7 million, respectively, of bad debt expense. The current period recovery of $1.8 million related to a bad debt provision decrease on a previous customer account deficit, in the C&RM segment, based on a revision to the amount considered collectible. During the nine months ended June 30, 2011, recoveries also include $1.3 million following a settlement relating to a disputed trade that was “given-up” to FCStone during the quarter ended June 30, 2010 by another futures commission merchant ("FCM") for a customer that held an account with us.

As a result of the acquisition of FCStone, the Company acquired certain notes receivable of $133.7 million at September 30, 2009, consisting of promissory notes from certain customers and an introducing broker which arose from previous customer account deficits, of which the Company estimated collectability to be $16.7 million. During the three months ended March 31, 2011, the Company recovered $11.4 million as partial payment against the promissory notes receivable from these certain customers, and charged off $111.5 million against the allowance for notes receivable related to these certain customer account deficits. Total recoveries from these certain customers and introducing broker through June 30, 2011 is $12.8 million, and remaining notes receivable related to these certain customer account deficits is $3.9 million. Subsequent to June 30, 2011, the Company collected $2.6 million against the promissory notes. The Company expects to collect the remaining amounts from the introducing broker, by withholding commissions due on future revenues collected by the Company, although no assurance can be given as to the timing of collection.

Activity in the allowance for doubtful accounts and notes was as follows:



(in millions)
Balance, September 30, 2010	$	119.2
Provision for bad debts	7.5
Transfer in (1)	2.5
Deductions:
Charge-offs	(113.3		)
Recoveries	(3.7		)
Balance, June 30, 2011	$	12.2

(1)

During the three months ended December 31, 2010, certain open position derivative contracts, which had a $2.5 million credit reserve at September 30, 2010 were closed, and the deficit account balance was reclassified from financial instruments owned to a receivable from customer. Accordingly, the previously established credit reserve amount was transferred into the allowance for doubtful accounts during the three months ended December 31, 2010.

Additionally, in the normal course of operations the Company accepts notes receivable under sale/repurchase agreements with customers whereby the customers sell certain commodity inventory and agree to repurchase the commodity inventory at a future date at either a fixed or floating rate. These transactions are short-term in nature, and are treated as secured borrowings rather than commodity inventory, purchases and sales in the Company’s condensed consolidated financial statements. At June 30, 2011 and September 30, 2010, the Company had outstanding notes receivable of $18.8 million and $13.6 million, respectively, related to this program