Note 6. 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 legally enforceable 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 5, Fair Value Disclosures and Note 19, 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 International Swaps and Derivative Association, Inc. (“ISDA”) master netting agreements or similar agreements with counterparties. A master agreement creates a single contract under which all transactions between two counterparties are executed allowing for trade aggregation and a single net payment obligation. Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due from the counterparty or a third party. In addition, we enter into customized bilateral trading agreements and other customer agreements that provide for the netting of receivables and payables with a given counterparty as a single net obligation.

Under our ISDA master netting agreements, we typically also execute credit support annexes, which provide for collateral, either in the form of cash or securities, to be posted by or paid to a counterparty based on the fair value of the derivative receivable or payable based on the rates and parameters established in the credit support annex. In the event of the counterparty’s default, provisions of the master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. In addition, any collateral posted can be applied to the net obligations, with any excess returned; and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims in bankruptcy court.

The conditions supporting the legal right of offset may vary from one legal jurisdiction to another and the enforceability of master netting agreements and bankruptcy laws in certain countries or in certain industries is not free from doubt. The right of offset is dependent both on contract law under the governing arrangement and consistency with the bankruptcy laws of the jurisdiction where the counterparty is located. Industry legal opinions with respect to the enforceability of certain standard provisions in respective jurisdictions are relied upon as a part of managing credit risk. In cases where we have not determined an agreement to be enforceable, the related amounts are not offset. Master netting agreements are a critical component of our risk management processes as part of reducing counterparty credit risk and managing liquidity risk.

We are also a party to clearing agreements with various central clearing parties. Under these arrangements, the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount. In the event of default, a net termination amount is determined based on the market values of all outstanding positions and the clearing organization or clearing member provides for the liquidation and settlement of the net termination amount among all counterparties to the open derivative contracts.

The following tables present the fair value and related number of derivative contracts at May 31, 2014 and November 30, 2013 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 the Consolidated Statements of Financial Condition as appropriate under 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). See Note 7, Collateralized Transactions, for information related to offsetting of certain secured financing transactions.


	M ay 31, 2014 (1)
	Assets					Liabilities
	Fair Value			Number of Contracts		Fair Value			Number of Contracts
Interest rate contracts
Exchange-traded	$	1,828			44,290	$	704			64,517
Cleared OTC		876,853			2,650		930,315			2,386
Bilateral OTC		793,513			1,913		747,723			830
Foreign exchange contracts
Exchange-traded		166			53,799		339			50,513
Bilateral OTC		474,467			11,146		488,424			12,430
Equity contracts
Exchange-traded		543,402			1,818,081		541,357			1,750,939
Bilateral OTC		10,220			2,531		13,856			850
Commodity contracts
Exchange-traded		68,481			844,560		69,765			837,632
Bilateral OTC		128,079			4,330		151,310			4,082
Credit contracts
Cleared OTC		3,386			4		6,550			9
Bilateral OTC		1,295			15		23,022			31

Total gross derivative assets/ liabilities:
Exchange-traded		613,877					612,165
Cleared OTC		880,239					936,865
Bilateral OTC		1,407,574					1,424,335
Amounts offset in the Consolidated Statements of Financial Condition (2):
Exchange-traded		(606,007	)				(606,007	)
Cleared OTC		(875,817	)				(889,732	)
Bilateral OTC		(1,166,683	)				(1,251,338	)

Net amounts per Consolidated Statements of Financial Condition (3)	$	253,183				$	226,288

(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)	Amounts netted include both netting by counterparty and for cash collateral paid or received.

(3)	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 the Consolidated Statements of Financial Condition.


	November 30, 2013 (1)
	Assets					Liabilities
				Number of					Number of
	Fair Value			Contracts		Fair Value			Contracts
Interest rate contracts
Exchange-traded	$	8,696			57,344	$	3,846			68,268
Cleared OTC		432,667			5,402		396,422			7,730
Bilateral OTC		724,613			1,221		730,897			1,340
Foreign exchange contracts
Exchange-traded		33			111,229		40			104,205
Bilateral OTC		653,739			7,478		693,618			8,212
Equity contracts
Exchange-traded		495,069			1,742,195		465,110			1,800,467
Bilateral OTC		6,715			148		9,875			136
Commodity contracts
Exchange-traded		27,185			785,718		33,661			780,358
Bilateral OTC		114,095			11,811		139,458			8,359
Credit contracts
Cleared OTC		49,531			49		51,632			46
Bilateral OTC		2,339			16		8,131			19

Total gross derivative assets/ liabilities:
Exchange-traded		530,983					502,657
Cleared OTC		482,198					448,054
Bilateral OTC		1,501,501					1,581,979
Amounts offset in the Consolidated Statements of Financial Condition (2):
Exchange-traded		(489,375	)				(489,375	)
Cleared OTC		(446,520	)				(445,106	)
Bilateral OTC		(1,317,694	)				(1,418,130	)

Net amounts per Consolidated Statements of Financial Condition (3)	$	261,093				$	180,079

(1)

(2)	Amounts netted include both netting by counterparty and for cash collateral paid or received.

(3)	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 the Consolidated Statements of Financial Condition.

The following table presents unrealized and realized gains (losses) on derivative contracts for the three and six months ended May 31, 2014, and for the three months ended May 31, 2013 and February 28, 2013 (in thousands):


	Successor									Predecessor
	Three Months Ended			Six Months Ended			Three Months Ended			Three Months Ended
Gains (Losses)	May 31, 2014			May 31, 2014			May 31, 2013			February 28, 2013
Interest rate contracts	$	(49,738	)	$	(49,946	)	$	29,381		$	38,936
Foreign exchange contracts		(4,281	)		1,156			4,135			11,895
Equity contracts		(73,529	)		(164,630	)		33,892			(22,021	)
Commodity contracts		21,794			37,980			21,513			19,585
Credit contracts		(11,441	)		(15,330	)		(11,010	)		(3,742	)

Total	$	(117,195	)	$	(190,770	)	$	77,911		$	44,653

OTC Derivatives. The following tables set forth by remaining contract maturity the fair value of OTC derivative assets and liabilities as of May 31, 2014 (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	$	52,226	$	1,435	$	—	$	—		$	53,661
Equity swaps and options		1,297		—		—		—			1,297
Total return swaps		6,559		—		—		—			6,559
Foreign currency forwards, swaps and options		85,715		15,283		51		(14,167	)		86,882
Interest rate swaps, options and forwards		80,802		114,082		129,218		(70,493	)		253,609

Total	$	226,599	$	130,800	$	129,269	$	(84,660	)		402,008

Cross product counterparty netting											(17,810	)

Total OTC derivative assets included in Financial instruments owned										$	384,198

(1)	At May 31, 2014, we held exchange traded derivative assets and other credit agreements with a fair value of $11.6 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 May 31, 2014, cash collateral received was $143.0 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	$	78,158	$	9,117	$	—	$	—		$	87,275
Credit default swaps		51		8,744		898		—			9,693
Equity swaps and options		—		—		9,300		—			9,300
Total return swaps		2,200		—		—		—			2,200
Foreign currency forwards, swaps and options		88,516		16,380		—		(14,167	)		90,729
Interest rate swaps, options and forwards		56,392		111,734		166,652		(70,493	)		264,285

Total	$	225,317	$	145,975	$	176,850	$	(84,660	)		463,482

Cross product counterparty netting											(17,810	)

Total OTC derivative liabilities included in Financial instruments sold, not yet purchased										$	445,672

(1)	At May 31, 2014, we held exchange traded derivative liabilities and other credit agreements with a fair value of $22.2 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 May 31, 2014, cash collateral pledged was $241.6 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 May 31, 2014, 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	$	179,090
BBB- to BBB+		52,347
BB+ or lower		82,789
Unrated		69,972

Total	$	384,198

(1)	We utilize internal credit ratings determined by our Risk Management. 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, 2014 and November 30, 2013 is $47.3 million and $170.2 million, respectively, for which we have posted collateral of $42.4 million and $127.7 million, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on May 31, 2014 and November 30, 2013, we would have been required to post an additional $5.6 million and $49.4 million, respectively, of collateral to our counterparties.