Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

Derivative Financial Instruments

Derivative Financial Instruments

5. Derivative Financial Instruments

The Company has in place an economic hedge program that uses total return swap contracts to hedge market risk related to its investments in certain sponsored funds.  Certain of the consolidated sponsored funds may utilize derivative financial instruments within their portfolios in pursuit of their stated investment objectives.  We do not hedge for speculative purposes.

Excluding derivative financial instruments held in certain consolidated sponsored funds, the Company was party to 14 total return swap contracts with a combined notional value of $222.1 million and five total return swap contracts with a combined notional value of $194.4 million as of September 30, 2019 and December 31, 2018, respectively. These derivative financial instruments are not designated as hedges for accounting purposes.  Changes in fair value of the total return swap contracts are recognized in investment and other income in the Company’s consolidated statements of income.  

The Company posted $0.6 million and $5.2 million in cash collateral with the counterparties of the total return swap contracts as of September 30, 2019 and December 31, 2018, respectively.  The cash collateral is included in Customers and other receivables in the Company’s consolidated balance sheet.  The Company does not record its fair value in derivative transactions against the posted collateral.

The following table presents the fair value of the derivative financial instruments, excluding derivative financial instruments held in certain consolidated sponsored funds, as of September 30, 2019 and December 31, 2018 and is calculated based on Level 2 inputs:

			September 30,		December 31,
	Balance sheet		2019		2018
	location	Fair value		Fair value
		(in thousands)
Total return swap contracts	Prepaid expenses and other current assets	$	153		4,968
Total return swap contracts	Other current liabilities		467		—
Net total return swap (liability) asset		$	(314)		4,968

The following is a summary of net gains (losses) recognized in income for the three and nine months ended September 30, 2019 and September 30, 2018:

		Three months ended			Nine months ended
	Income statement	September 30,			September 30,
	location		2019	2018		2019	2018
		(in thousands)			(in thousands)
Total return swap contracts	Investment and other income	$	135	(6,769)	$	(25,728)	(7,313)