Derivative Financial Instruments

3 Months Ended

Feb. 28, 2013

Derivative Financial Instruments

Note 7. Derivative Financial Instruments

Off-Balance Sheet Risk

We have contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to resell, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the fair values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a material effect upon our consolidated financial statements.

Derivative Financial Instruments

Our derivative activities are recorded at fair value in the Consolidated Statements of Financial Condition in Financial instruments owned – derivatives and Financial instruments sold, not yet purchased – derivatives net of cash paid or received under credit support agreements and on a net counterparty basis when a legal right to offset exists under a master netting agreement. Net realized and unrealized gains and losses are recognized in Principal transactions in the Consolidated Statements of Earnings on a trade date basis and as a component of cash flows from operating activities in the Consolidated Statements of Cash Flows. Acting in a trading capacity, we may 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. (See Note 6, Fair Value Disclosures and Note 21, Commitments, Contingencies and Guarantees for additional disclosures about derivative 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 master netting agreements and collateral arrangements with counterparties. These agreements provide us with the ability to offset a counterparty’s rights and obligations, request additional collateral when necessary or liquidate the collateral in the event of counterparty default.

The following tables present the fair value and related number of derivative contracts at February 28, 2013 and November 30, 2012 categorized by predominant risk exposure. The fair value of assets/liabilities related to derivative contracts represents our receivable/payable for derivative financial instruments, gross of counterparty netting and cash collateral received and pledged (in thousands, except contract amounts):

	February 28, 2013
	Assets					Liabilities
	Fair Value			Number of Contracts		Fair Value			Number of Contracts
Interest rate contracts	$	805,821			32,262	$	915,449			32,790
Foreign exchange contracts		537,752			89,195		526,944			87,414
Equity contracts		428,877			1,892,132		421,858			2,754,124
Commodity contracts		158,064			1,534,542		204,924			1,528,982
Credit contracts		7,319			23		18,737			52
Total		1,937,833					2,087,912
Counterparty/cash-collateral netting		(1,730,913	)				(1,867,215	)
Total per Consolidated Statement of Financial Condition	$	206,920				$	220,697

	November 30, 2012
	Assets					Liabilities
	Fair Value			Number of Contracts		Fair Value			Number of Contracts
Interest rate contracts	$	927,896			67,410	$	1,065,788			90,831
Foreign exchange contracts		387,325			118,958		357,277			116,758
Equity contracts		577,964			1,526,127		528,979			1,396,213
Commodity contracts		265,703			754,987		278,660			728,696
Credit contracts		4,448			13		11,301			40
Total		2,163,336					2,242,005
Counterparty/cash-collateral netting		(1,865,250	)				(2,012,878	)
Total per Consolidated Statement of Financial Condition	$	298,086				$	229,127

The following table presents unrealized and realized gains (losses) on derivative contracts for the three months ended February 28, 2013 and February 29, 2012 (in thousands):

	Three Months Ended
Gains (Losses)	February 28, 2013			February 29, 2012
Interest rate contracts	$	25,713		$	(16,235	)
Foreign exchange contracts		11,895			1,161
Equity contracts		(5,436	)		(30,112	)
Commodity contracts		19,585			20,680
Credit contracts		(3,742	)		(15,227	)
Total	$	48,015		$	(39,733	)

OTC Derivatives. The following tables set forth the remaining contract maturity of the fair value of OTC derivative assets and liabilities as of February 28, 2013 (in thousands):

	OTC Derivative Assets (1) (2) (4)
	0 – 12 Months		1 – 5 Years		Greater Than 5 Years		Cross- Maturity Netting (3)			Total
Commodity swaps, options and forwards	$	61,023	$	137	$	—	$	(318	)	$	60,842
Credit default swaps		—		3,844		—		—			3,844
Equity swaps and options		1,622		—		—		—			1,622
Total return swaps		1,277		—		—		—			1,277
Foreign currency forwards, swaps and options		82,784		32,781		—		(8,301	)		107,264
Fixed income forwards		—		—		447		—			447
Interest rate swaps and options		19,464		47,523		179,557		(77,633	)		168,911
Total	$	166,170	$	84,285	$	180,004	$	(86,252	)		344,207
Cross product counterparty netting											(1,511	)
Total OTC derivative assets included in Financial instruments owned										$	342,696

(1) At February 28, 2013, we held exchange traded derivative assets and other credit enhancements with a fair value of $20.5 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 on the Consolidated Statements of Financial Condition. At February 28, 2013, cash collateral received was $156.3 million.

(3) Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.

(4) Derivative fair values include counterparty netting within product category.

	OTC Derivative Liabilities (1) (2) (4)
	0 – 12 Months		1 – 5 Years		Greater Than 5 Years		Cross- Maturity Netting (3)			Total
Commodity swaps, options and forwards	$	107,646	$	108	$	—	$	(318	)	$	107,436
Credit default swaps		238		7,014		—		—			7,252
Equity swaps and options		3,148		—		—		—			3,148
Total return swaps		6,248		—		—		—			6,248
Foreign currency forwards, swaps and options		73,554		31,197		—		(8,301	)		96,450
Interest rate swaps and options		16,612		130,979		210,771		(77,633	)		280,729
Total	$	207,446	$	169,298	$	210,771	$	(86,252	)		501,263
Cross product counterparty netting											(1,511	)
Total OTC derivative liabilities included in Financial instruments sold, not yet purchased										$	499,752

(1) At February 28, 2013, we held exchange traded derivative liabilities and other credit enhancements with a fair value of $13.5 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 on the Consolidated Statements of Financial Condition. At February 28, 2013, cash collateral pledged was $292.6 million.

(3) Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.

(4) Derivative fair values include counterparty netting within product category.

At February 28, 2013, 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	$	225,413
BBB- to BBB+		42,967
BB+ or lower		66,073
Unrated		8,243
Total	$	342,696

(1) We utilize internal credit ratings determined by our Credit Risk Management. Credit ratings determined by Credit 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 February 28, 2013 and November 30, 2012 is $172.6 million and $164.8 million, respectively, for which we have posted collateral of $113.6 million and $129.2 million, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on February 28, 2013 and November 30, 2012, we would have been required to post an additional $63.9 million $38.1 million, respectively, of collateral to our counterparties.