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 August 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).



	August 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	$	—		—	$	30,018		1
Total derivatives designated as accounting hedges	—				30,018

Derivatives not designated as accounting hedges:
Interest rate contracts:
Exchange-traded	1,047			17,218	12			35,304
Cleared OTC	411,969			2,116	405,580			2,325
Bilateral OTC	353,217			1,533	486,970			702
Foreign exchange contracts:
Exchange-traded	232			2,073	127			901
Bilateral OTC	234,331			6,488	223,397			6,580
Equity contracts:
Exchange-traded	2,332,241			1,765,239	2,718,615			1,632,359
Bilateral OTC	150,206			2,610	259,262			5,266
Commodity contracts:
Exchange-traded	17			1,218	89			1,366
Credit contracts:
Cleared OTC	15,076			13	5,166			16
Bilateral OTC	8,235			123	13,868			54
Total derivatives not designated as accounting hedges	3,506,571				4,113,086
Total gross derivative assets/ liabilities:
Exchange-traded	2,333,537				2,718,843
Cleared OTC	427,045				440,764
Bilateral OTC	745,989				983,497
Amounts offset in our Consolidated Statements of Financial Condition (3):
Exchange-traded	(2,248,951		)		(2,248,951		)
Cleared OTC	(405,840		)		(425,242		)
Bilateral OTC	(676,352		)		(777,338		)
Net amounts per Consolidated Statements of Financial Condition (4)	$	175,428			$	691,573


(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 August 31,						Nine Months Ended August 31,
Gains (Losses)	2018			2017			2018			2017
Interest rate swaps	$	(1,161	)	$	6,217		$	(22,363	)	$	13,960
Long-term debt	1,221			(4,680		)	24,055			(9,570		)
Total	$	60		$	1,537		$	1,692		$	4,390

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 August 31,						Nine Months Ended August 31,
Gains (Losses)	2018			2017			2018			2017
Interest rate contracts	$	13,951		$	(6,432	)	$	36,053		$	2,605
Foreign exchange contracts	(4,421		)	1,028			6,207			4,135
Equity contracts	1,807			(106,425		)	(215,232		)	(275,124		)
Commodity contracts	281			1,508			3,025			(5,398		)
Credit contracts	620			311			3,026			11,218
Total	$	12,238		$	(110,010	)	$	(166,921	)	$	(262,564	)

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 August 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	$	10,226	$	8,071	$	2,195	$	—		$	20,492
Credit default swaps	82		17,846		—		(11		)	17,917
Total return swaps	46,036		29,910		—		(4,334		)	71,612
Foreign currency forwards, swaps and options	42,326		22,130		—		(9,550		)	54,906
Fixed income forwards	2,113		—		—		—			2,113
Interest rate swaps, options and forwards	13,104		96,631		95,973		(91,673		)	114,035
Total	$	113,887	$	174,588	$	98,168	$	(105,568	)	281,075
Cross product counterparty netting										(32,615		)
Total OTC derivative assets included in Financial instruments owned										$	248,460


(1)	At August 31, 2018, we held exchange-traded derivative assets and other credit agreements with a fair value of $85.2 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 August 31, 2018, cash collateral received was $158.2 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	$	15,125	$	92,491	$	13,048	$	—		$	120,664
Credit default swaps	17		10,374		—		(11		)	10,380
Total return swaps	67,526		19,806		—		(4,334		)	82,998
Foreign currency forwards, swaps and options	36,176		17,496		—		(9,550		)	44,122
Fixed income forwards	685		—		—		—			685
Interest rate swaps, options and forwards	16,388		148,685		198,569		(91,673		)	271,969
Total	$	135,917	$	288,852	$	211,617	$	(105,568	)	530,818
Cross product counterparty netting										(32,615		)
Total OTC derivative liabilities included in Financial instruments sold, not yet purchased										$	498,203


(1)	At August 31, 2018, we held exchange-traded derivative liabilities and other credit agreements with a fair value of $472.0 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 August 31, 2018, cash collateral pledged was $278.6 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.

The following table presents the counterparty credit quality with respect to the fair value of our OTC derivative assets at August 31, 2018 (in thousands):



Counterparty credit quality (1):
A- or higher	$	135,060
BBB- to BBB+	20,490
BB+ or lower	74,097
Unrated	18,813
Total	$	248,460


(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):



	August 31, 2018
	External Credit Rating
	Investment Grade		Non-investment Grade		Unrated		Total Notional
Credit protection sold:
Index credit default swaps	$	3.0	$	15.0	$	—	$	18.0
Single name credit default swaps	32.5		34.8		2.9		70.2



	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):



	August 31, 2018			November 30, 2017
Derivative instrument liabilities with credit-risk-related contingent features	$	106.3		$	95.1
Collateral posted	(59.3		)	(86.4		)
Collateral received	129.7			5.6
Return of and additional collateral required in the event of a credit rating downgrade below investment grade (1)	176.6			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.