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. Predominantly, 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 15, 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, 2016 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, 2017 and November 30, 2016 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, 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	$	10,448		1	$	—		—
Total derivatives designated as accounting hedges	10,448				—

Derivatives not designated as accounting hedges:
Interest rate contracts:
Exchange-traded	632			17,359	73			48,603
Cleared OTC	1,815,375			3,485	1,765,864			3,750
Bilateral OTC	417,755			1,691	386,018			559
Foreign exchange contracts:
Exchange-traded	—			496	—			176
Bilateral OTC	295,104			5,416	293,527			5,688
Equity contracts:
Exchange-traded	415,268			1,975,152	720,347			1,696,985
Bilateral OTC	51,826			1,161	79,257			1,134
Commodity contracts:
Exchange-traded	—			5,020	—			5,155
Credit contracts:
Cleared OTC	26,980			59	37,238			72
Bilateral OTC	17,241			148	17,760			142
Total derivatives not designated as hedges	3,040,181				3,300,084

Total gross derivative assets/ liabilities:
Exchange-traded	415,900				720,420
Cleared OTC	1,852,803				1,803,102
Bilateral OTC	781,926				776,562
Amounts offset in our Consolidated Statements of Financial Condition (3):
Exchange-traded	(409,282		)		(409,282		)
Cleared OTC	(1,841,960		)		(1,789,139		)
Bilateral OTC	(620,956		)		(661,259		)
Net amounts per Consolidated Statements of Financial Condition (4)	$	178,431			$	440,404


(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 brokers, dealers and clearing organizations on 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, 2016 (1)
	Assets				Liabilities
	Fair Value			Number of Contracts (2)	Fair Value			Number of Contracts (2)
Derivatives not designated as accounting hedges:
Interest rate contracts:
Exchange-traded	$	2,275		24,300	$	24		29,773
Cleared OTC (3)	2,835,812			3,596	2,636,469			3,445
Bilateral OTC	444,159			1,136	522,965			1,627
Foreign exchange contracts:
Exchange-traded	—			376	—			686
Bilateral OTC	529,609			7,448	516,869			7,633
Equity contracts:
Exchange-traded	712,767			2,820,702	1,095,582			2,410,956
Bilateral OTC	72,041			1,077	67,033			1,191
Commodity contracts:
Exchange-traded	—			1,356	—			920
Credit contracts:
Cleared OTC	645			6	2,304			8
Bilateral OTC	19,225			213	25,503			184
Total gross derivative assets/liabilities:
Exchange-traded	715,042				1,095,606
Cleared OTC	2,836,457				2,638,773
Bilateral OTC	1,065,034				1,132,370
Amounts offset in our Consolidated Statements of Financial Condition (4):
Exchange-traded	(691,009		)		(691,009		)
Cleared OTC (3)	(2,751,650		)		(2,638,774		)
Bilateral OTC	(813,340		)		(899,431		)
Net amounts per Consolidated Statements of Financial Condition (5)	$	360,534			$	637,535


(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 brokers, dealers and clearing organizations on our Consolidated Statements of Financial Condition.

(3)

Pursuant to a rule change by the Chicago Mercantile Exchange in the first quarter of 2017, variation margin exchanged each day with this clearing organization on certain interest rate and credit 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, 2016 of approximately $1.0 billion, and a corresponding decrease in counterparty and cash collateral netting, with no impact to the 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)	2017			2016		2017			2016
Interest rate swaps	$	12,352		$	—	$	7,743		$	—
Long-term debt	(10,295		)	—		(4,890		)	—
Total	$	2,057		$	—	$	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)	2017			2016			2017			2016
Interest rate contracts	$	(960	)	$	(7,559	)	$	9,037		$	(80,084	)
Foreign exchange contracts	1,099			4,525			3,107			6,114
Equity contracts	417			(98,546		)	(168,699		)	(324,212		)
Commodity contracts	(6,395		)	(315		)	(6,906		)	(2,190		)
Credit contracts	(1,134		)	10,306			10,907			(2,583		)
Total	$	(6,973	)	$	(91,589	)	$	(152,554	)	$	(402,955	)

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, 2017 (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	$	4,049	$	3,451	$	—	$	—		$	7,500
Credit default swaps	3,671		1,515		3,862		(164		)	8,884
Total return swaps	20,455		2,652		262		(822		)	22,547
Foreign currency forwards, swaps and options	67,838		6,873		—		(2,998		)	71,713
Interest rate swaps, options and forwards	36,082		164,435		103,571		(65,569		)	238,519
Total	$	132,095	$	178,926	$	107,695	$	(69,553	)	349,163
Cross product counterparty netting										(11,429		)
Total OTC derivative assets included in Financial instruments owned										$	337,734


(1)	At May 31, 2017, we held exchange-traded derivative assets and other credit agreements with a fair value of $7.3 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, 2017, cash collateral received was $166.6 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	$	13,419	$	17,600	$	2,385	$	—		$	33,404
Credit default swaps	1,986		12,843		2,651		(164		)	17,316
Total return swaps	18,801		4,075		203		(822		)	22,257
Foreign currency forwards, swaps and options	70,074		3,065		—		(2,998		)	70,141
Fixed income forwards	1,687		—		—		—			1,687
Interest rate swaps, options and forwards	33,981		92,311		86,507		(65,569		)	147,230
Total	$	139,948	$	129,894	$	91,746	$	(69,553	)	292,035
Cross product counterparty netting										(11,429		)
Total OTC derivative liabilities included in Financial instruments sold, not yet purchased										$	280,606


(1)	At May 31, 2017, we held exchange-traded derivative liabilities and other credit agreements with a fair value of $313.9 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, 2017, cash collateral pledged was $154.1 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.

At May 31, 2017, the counterparty credit quality with respect to the fair value of our OTC derivatives assets was as follows (in thousands):



Counterparty credit quality (1):
A- or higher	$	147,797
BBB- to BBB+	56,371
BB+ or lower	74,164
Unrated	59,402
Total	$	337,734


(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.

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 aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a liability position at May 31, 2017 and November 30, 2016 is $122.5 million and $70.6 million, respectively, for which we have posted collateral of $80.9 million and $44.4 million, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on May 31, 2017 and November 30, 2016, we would have been required to post an additional $40.7 million and $26.1 million, respectively, of collateral to our counterparties.