| Derivative Financial Instruments |
Derivative Financial Instruments Derivative Financial Instruments Our derivative activities are recorded at fair value in our Consolidated Statements of Financial Condition in Financial instruments owned and Financial instruments sold, not yet purchased, net of cash paid or received under credit support agreements and on a net counterparty basis when a legally enforceable right to offset exists under a master netting agreement. We enter into derivative transactions to satisfy the needs of our clients and to manage our own exposure to market and credit risks resulting from our trading activities. In addition, we apply hedge accounting to an interest rate swap that has been designated as a fair value hedge of the changes in fair value due to the benchmark interest rate for certain fixed rate senior long-term debt. See Note 4, Fair Value Disclosures, and Note 16, Commitments, Contingencies and Guarantees, for additional disclosures about derivative financial instruments. Derivatives are subject to various risks similar to other financial instruments, including market, credit and operational risk. The risks of derivatives should not be viewed in isolation, but rather should be considered on an aggregate basis along with our other trading-related activities. We manage the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of our firm wide risk management policies. In connection with our derivative activities, we may enter into International Swaps and Derivatives Association, Inc. (“ISDA”) master netting agreements or similar agreements with counterparties. See Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended November 30, 2017 for additional information regarding the offsetting of derivative contracts. The following tables present the fair value and related number of derivative contracts at May 31, 2018 and November 30, 2017 categorized by type of derivative contract and the platform on which these derivatives are transacted. The fair value of assets/liabilities represents our receivable/payable for derivative financial instruments, gross of counterparty netting and cash collateral received and pledged. The following tables also provide information regarding 1) the extent to which, under enforceable master netting arrangements, such balances are presented net in our Consolidated Statements of Financial Condition as appropriate under U.S. GAAP and 2) the extent to which other rights of setoff associated with these arrangements exist and could have an effect on our financial position (in thousands, except contract amounts). | | | | | | | | | | | | | | | | May 31, 2018 (1) | | Assets | | Liabilities | | Fair Value | | Number of Contracts (2) | | Fair Value | | Number of Contracts (2) | Derivatives designated as accounting hedges: | | | | | | | | Interest rate contracts: | | | | | | | | Cleared OTC | $ | — |
| | — |
| | $ | 25,668 |
| | 1 |
| Total derivatives designated as accounting hedges | — |
| | | | 25,668 |
| | | | | | | | | | | Derivatives not designated as accounting hedges: | | | | | | | | Interest rate contracts: | | | | | | | | Exchange-traded | 877 |
| | 52,817 |
| | 70 |
| | 17,923 |
| Cleared OTC | 423,300 |
| | 2,102 |
| | 429,762 |
| | 2,481 |
| Bilateral OTC | 383,485 |
| | 1,598 |
| | 523,431 |
| | 795 |
| Foreign exchange contracts: | | | | | | | | Exchange-traded | — |
| | 1,311 |
| | — |
| | 376 |
| Bilateral OTC | 289,720 |
| | 5,190 |
| | 282,478 |
| | 5,221 |
| Equity contracts: | | | | | | | | Exchange-traded | 2,121,965 |
| | 2,136,503 |
| | 2,083,622 |
| | 1,865,988 |
| Bilateral OTC | 99,785 |
| | 1,960 |
| | 297,566 |
| | 2,418 |
| Commodity contracts: | | | | | | | | Exchange-traded | 105 |
| | 4,154 |
| | 27 |
| | 4,680 |
| Credit contracts: | | | | | | | | Cleared OTC | 42,968 |
| | 74 |
| | 25,053 |
| | 67 |
| Bilateral OTC | 8,735 |
| | 77 |
| | 11,823 |
| | 39 |
| Total derivatives not designated as accounting hedges | 3,370,940 |
| | | | 3,653,832 |
| | | Total gross derivative assets/ liabilities: | | | | | | | | Exchange-traded | 2,122,947 |
| | | | 2,083,719 |
| |
| Cleared OTC | 466,268 |
| | | | 480,483 |
| |
| Bilateral OTC | 781,725 |
| | | | 1,115,298 |
| |
| Amounts offset in our Consolidated Statements of Financial Condition (3): | | | | | | | | Exchange-traded | (1,957,490 | ) | | | | (1,957,490 | ) | | | Cleared OTC | (439,765 | ) | | | | (448,493 | ) | | | Bilateral OTC | (698,221 | ) | | | | (825,951 | ) | | | Net amounts per Consolidated Statements of Financial Condition (4) | $ | 275,464 |
| | | | $ | 447,566 |
| | |
| | (1) | Exchange-traded derivatives include derivatives executed on an organized exchange. Cleared OTC derivatives include derivatives executed bilaterally and subsequently novated to and cleared through central clearing counterparties. Bilateral OTC derivatives include derivatives executed and settled bilaterally without the use of an organized exchange or central clearing counterparty. |
| | (2) | Number of exchange traded contracts may include open futures contracts. The unsettled fair value of these futures contracts is included in Receivables from/Payables to brokers, dealers and clearing organizations in our Consolidated Statements of Financial Condition. |
| | (3) | Amounts netted include both netting by counterparty and for cash collateral paid or received. |
| | (4) | We have not received or pledged additional collateral under master netting agreements and/or other credit support agreements that is eligible to be offset beyond what has been offset in our Consolidated Statements of Financial Condition. |
| | | | | | | | | | | | | | | | November 30, 2017 (1) | | Assets | | Liabilities | | Fair Value | | Number of Contracts (2) | | Fair Value | | Number of Contracts (2) | Derivatives designated as accounting hedges: | | | | | | | | Interest rate contracts: | | | | | | | | Cleared OTC (3) | $ | — |
| | — |
| | $ | 2,420 |
| | 1 |
| Total derivatives designated as accounting hedges | — |
| | | | 2,420 |
| | | | | | | | | | | Derivatives not designated as accounting hedges: | | | | | | | | Interest rate contracts: | | | | | | | | Exchange-traded | 1,957 |
| | 33,972 |
| | 66 |
| | 8,515 |
| Cleared OTC (3) | 1,334,878 |
| | 2,711 |
| | 1,263,994 |
| | 2,948 |
| Bilateral OTC | 380,223 |
| | 1,804 |
| | 444,716 |
| | 1,346 |
| Foreign exchange contracts: | | | | | | | | Exchange-traded | 157 |
| | 2,045 |
| | 20 |
| | 101 |
| Bilateral OTC | 303,091 |
| | 4,338 |
| | 286,582 |
| | 4,361 |
| Equity contracts: | | | | | | | | Exchange-traded | 1,288,295 |
| | 2,654,555 |
| | 1,375,832 |
| | 2,090,935 |
| Bilateral OTC | 78,812 |
| | 1,847 |
| | 247,750 |
| | 1,722 |
| Commodity contracts: | | | | | | | | Exchange-traded | 209 |
| | 3,723 |
| | 18 |
| | 3,819 |
| Credit contracts: | | | | | | | | Cleared OTC | 5,506 |
| | 18 |
| | 8,613 |
| | 27 |
| Bilateral OTC | 24,921 |
| | 110 |
| | 33,188 |
| | 164 |
| Total derivatives not designated as accounting hedges | 3,418,049 |
| | | | 3,660,779 |
| | | Total gross derivative assets/liabilities: | | | | | | | | Exchange-traded | 1,290,618 |
| | | | 1,375,936 |
| | | Cleared OTC | 1,340,384 |
| | | | 1,275,027 |
| | | Bilateral OTC | 787,047 |
| | | | 1,012,236 |
| | | Amounts offset in our Consolidated Statements of Financial Condition (4): | | | | | | | | Exchange-traded | (1,268,043 | ) | | | | (1,268,043 | ) | | | Cleared OTC (3) | (1,319,895 | ) | | | | (1,274,900 | ) | | | Bilateral OTC | (666,278 | ) | | | | (883,306 | ) | | | Net amounts per Consolidated Statements of Financial Condition (5) | $ | 163,833 |
| | | | $ | 236,950 |
| | |
| | (1) | Exchange-traded derivatives include derivatives executed on an organized exchange. Cleared OTC derivatives include derivatives executed bilaterally and subsequently novated to and cleared through central clearing counterparties. Bilateral OTC derivatives include derivatives executed and settled bilaterally without the use of an organized exchange or central clearing counterparty. |
| | (2) | Number of exchange traded contracts may include open futures contracts. The unsettled fair value of these futures contracts is included in Receivables from/Payables to brokers, dealers and clearing organizations in our Consolidated Statements of Financial Condition. |
| | (3) | Pursuant to a rule change by the London Clearing House in the first fiscal quarter of 2018, variation margin exchanged each day with this clearing organization on certain interest rate derivatives is characterized as settlement payments as opposed to cash posted as collateral. The impact of this rule change would have been a reduction in gross interest rate derivative assets and liabilities as of November 30, 2017 of approximately $800 million, and a corresponding decrease in counterparty and cash collateral netting, with no impact to our Consolidated Statement of Financial Condition. |
| | (4) | Amounts netted include both netting by counterparty and for cash collateral paid or received. |
| | (5) | We have not received or pledged additional collateral under master netting agreements and/or other credit support agreements that is eligible to be offset beyond what has been offset in our Consolidated Statements of Financial Condition. |
The following table provides information related to gains (losses) recognized in Interest expense in our Consolidated Statements of Earnings on a fair value hedge (in thousands): | | | | | | | | | | | | | | | | | | Three Months Ended
May 31, | | Six Months Ended
May 31, | Gains (Losses) | 2018 | | 2017 | | 2018 | | 2017 | Interest rate swaps | $ | 19 |
| | $ | 12,352 |
| | $ | (21,202 | ) | | $ | 7,743 |
| Long-term debt | 120 |
| | (10,295 | ) | | 22,835 |
| | (4,890 | ) | Total | $ | 139 |
| | $ | 2,057 |
| | $ | 1,633 |
| | $ | 2,853 |
|
The following table presents unrealized and realized gains (losses) on derivative contracts recognized in Principal transactions revenue in our Consolidated Statements of Earnings, which are utilized in connection with our client activities and our economic risk management activities (in thousands): | | | | | | | | | | | | | | | | | | Three Months Ended
May 31, | | Six Months Ended
May 31, | Gains (Losses) | 2018 | | 2017 | | 2018 | | 2017 | Interest rate contracts | $ | (4,860 | ) | | $ | (960 | ) | | $ | 22,102 |
| | $ | 9,037 |
| Foreign exchange contracts | 6,365 |
| | 1,099 |
| | 10,628 |
| | 3,107 |
| Equity contracts | (53,598 | ) | | 417 |
| | (217,039 | ) | | (168,699 | ) | Commodity contracts | 2,921 |
| | (6,395 | ) | | 2,744 |
| | (6,906 | ) | Credit contracts | 2,024 |
| | (1,134 | ) | | 2,406 |
| | 10,907 |
| Total | $ | (47,148 | ) | | $ | (6,973 | ) | | $ | (179,159 | ) | | $ | (152,554 | ) |
The net gains (losses) on derivative contracts in the table above are one of a number of activities comprising our business activities and are before consideration of economic hedging transactions, which generally offset the net gains (losses) included above. We substantially mitigate our exposure to market risk on our cash instruments through derivative contracts, which generally provide offsetting revenues, and we manage the risk associated with these contracts in the context of our overall risk management framework. OTC Derivatives. The following tables set forth by remaining contract maturity the fair value of OTC derivative assets and liabilities at May 31, 2018 (in thousands): | | | | | | | | | | | | | | | | | | | | | | OTC Derivative Assets (1) (2) (3) | | 0 – 12 Months | | 1 – 5 Years | | Greater Than 5 Years | | Cross-Maturity Netting (4) | | Total | Equity swaps and options | $ | 940 |
| | $ | 4,178 |
| | $ | — |
| | $ | (214 | ) | | $ | 4,904 |
| Credit default swaps | 26 |
| | 20,045 |
| | 2,790 |
| | (779 | ) | | 22,082 |
| Total return swaps | 49,176 |
| | 3,233 |
| | — |
| | (756 | ) | | 51,653 |
| Foreign currency forwards, swaps and options | 58,321 |
| | 17,215 |
| | — |
| | (3,355 | ) | | 72,181 |
| Fixed income forwards | 477 |
| | — |
| | — |
| | — |
| | 477 |
| Interest rate swaps, options and forwards | 21,599 |
| | 104,120 |
| | 88,827 |
| | (86,399 | ) | | 128,147 |
| Total | $ | 130,539 |
| | $ | 148,791 |
| | $ | 91,617 |
| | $ | (91,503 | ) | | 279,444 |
| Cross product counterparty netting | | | | | | | | | (34,466 | ) | Total OTC derivative assets included in Financial instruments owned | | | | | | | | | $ | 244,978 |
|
| | (1) | At May 31, 2018, we held exchange-traded derivative assets and other credit agreements with a fair value of $166.0 million, which are not included in this table. |
| | (2) | OTC derivative assets in the table above are gross of collateral received. OTC derivative assets are recorded net of collateral received in our Consolidated Statements of Financial Condition. At May 31, 2018, cash collateral received was $135.6 million. |
| | (3) | Derivative fair values include counterparty netting within product category. |
| | (4) | Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories. |
| | | | | | | | | | | | | | | | | | | | | | OTC Derivative Liabilities (1) (2) (3) | | 0 – 12 Months | | 1 – 5 Years | | Greater Than 5 Years | | Cross-Maturity Netting (4) | | Total | Equity swaps and options | $ | 13,752 |
| | $ | 69,159 |
| | $ | 3,141 |
| | $ | (214 | ) | | $ | 85,838 |
| Credit default swaps | 64 |
| | 7,405 |
| | 6 |
| | (779 | ) | | 6,696 |
| Total return swaps | 64,750 |
| | 101,271 |
| | — |
| | (756 | ) | | 165,265 |
| Foreign currency forwards, swaps and options | 55,185 |
| | 13,123 |
| | — |
| | (3,355 | ) | | 64,953 |
| Fixed income forwards | 3,879 |
| | — |
| | — |
| | — |
| | 3,879 |
| Interest rate swaps, options and forwards | 35,661 |
| | 135,417 |
| | 215,891 |
| | (86,399 | ) | | 300,570 |
| Total | $ | 173,291 |
| | $ | 326,375 |
| | $ | 219,038 |
| | $ | (91,503 | ) | | 627,201 |
| Cross product counterparty netting | | | | | | | | | (34,466 | ) | Total OTC derivative liabilities included in Financial instruments sold, not yet purchased | | | | | | | | | $ | 592,735 |
|
| | (1) | At May 31, 2018, we held exchange-traded derivative liabilities and other credit agreements with a fair value of $126.9 million, which are not included in this table. |
| | (2) | OTC derivative liabilities in the table above are gross of collateral pledged. OTC derivative liabilities are recorded net of collateral pledged in our Consolidated Statements of Financial Condition. At May 31, 2018, cash collateral pledged was $272.0 million. |
| | (3) | Derivative fair values include counterparty netting within product category. |
| | (4) | Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories. |
The following table presents the counterparty credit quality with respect to the fair value of our OTC derivative assets at May 31, 2018 (in thousands): | | | | | Counterparty credit quality (1): | | A- or higher | $ | 173,732 |
| BBB- to BBB+ | 3,835 |
| BB+ or lower | 52,437 |
| Unrated | 14,974 |
| Total | $ | 244,978 |
|
| | (1) | We utilize internal credit ratings determined by our Risk Management department. Credit ratings determined by Risk Management use methodologies that produce ratings generally consistent with those produced by external rating agencies. |
Credit Related Derivative Contracts The external credit ratings of the underlyings or referenced assets for our written credit related derivative contracts (in millions): | | | | | | | | | | | | | | May 31, 2018 | | External Credit Rating | | | | Investment Grade | | Non-investment Grade | | Total Notional | Credit protection sold: | | | | | | Index credit default swaps | $ | 203.0 |
| | $ | 280.0 |
| | $ | 483.0 |
| Single name credit default swaps | 44.3 |
| | 27.8 |
| | 72.1 |
|
| | | | | | | | | | | | | | November 30, 2017 | | External Credit Rating | | | | Investment Grade | | Non-investment Grade | | Total Notional | Credit protection sold: | | | | | | Index credit default swaps | $ | 3.0 |
| | $ | 46.0 |
| | $ | 49.0 |
| Single name credit default swaps | 129.1 |
| | 89.1 |
| | 218.2 |
|
Contingent Features Certain of our derivative instruments contain provisions that require our debt to maintain an investment grade credit rating from each of the major credit rating agencies. If our debt were to fall below investment grade, it would be in violation of these provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on our derivative instruments in liability positions. The following table presents the aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a liability position, the collateral amounts we have posted or received in the normal course of business and the potential collateral we would have been required to return and/or post additionally to our counterparties if the credit-risk-related contingent features underlying these agreements were triggered (in millions): | | | | | | | | | | May 31, 2018 | | November 30, 2017 | Derivative instrument liabilities with credit-risk-related contingent features | $ | 186.1 |
| | $ | 95.1 |
| Collateral posted | (56.1 | ) | | (86.4 | ) | Collateral received | 119.5 |
| | 5.6 |
| Return of and additional collateral required in the event of a credit rating downgrade below investment grade (1) | 249.5 |
| | 14.3 |
|
| | (1) | These outflows include initial margin received from counterparties at the execution of the derivative contract. The initial margin will be returned if counterparties elect to terminate the contract after a downgrade. |
|