Derivatives and Hedging Instruments

The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging.

The following table summarizes the fair value of derivative instruments as recorded in the Company’s consolidated statements of financial condition (in thousands):



	December 31, 2018				December 31, 2017
	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Interest rate cap contracts	Other assets	$	2,023		Other assets	$	—
Foreign currency exchange contracts	Other liabilities	(237		)	Other assets	1,912
Interest rate swap agreements	Other liabilities	(4,881		)	Other liabilities	(7		)
Derivatives not designated as hedging instruments:
Interest rate cap contracts	Other assets	—			Other assets	3,922
Foreign currency exchange contracts	Other liabilities	—			Other liabilities	(1,110		)

Derivatives Designated as Hedging Instruments

The Company has operations in foreign countries, which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company enters into derivative financial instruments, principally foreign currency forward contracts with financial counterparties. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis.

Certain of the foreign currency forward contracts are designated as cash flow hedging instruments and qualify for hedge accounting treatment. Gains and losses arising from such contracts are recorded as a component of accumulated other comprehensive income (“OCI”) as gains and losses on derivative instruments, net of income taxes. The hedging gains and losses in OCI are subsequently reclassified into earnings in the same period in which the underlying transactions affect the Company’s earnings. If all or a portion of the forecasted transaction is cancelled, the accumulated gains or losses in OCI would be reclassified into earnings.

As of December 31, 2018, the total notional amount of the foreign currency forward contracts that are designated as cash flow hedging instruments was $12.0 million. All of these outstanding contracts qualified for hedge accounting treatment. The Company estimates that approximately $0.2 million of net derivative loss included in OCI will be reclassified into earnings within the next 12 months. No gain or loss was reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the years ended December 31, 2018, 2017, or 2016.

The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. Under the swap agreements, the Company receives floating interest rate payments and makes interest payments based on fixed interest rates. In accordance with authoritative guidance relating to derivatives and hedging transactions, the Company designates its interest rate swap instruments as cash flow hedges. As of December 31, 2018, there were six interest rate swap agreements outstanding with a total notional amount of $368.1 million.

As of December 31, 2018, the Company also held two interest rate cap contracts (the “2018 Caps”) with a notional amount of £350.0 million (approximately $445.8 million) that are used to manage its risk related to interest rate fluctuations on the Company’s variable interest rate bearing debt. The 2018 Caps mature in 2021 and are structured as a series of European call options (“Caplets”) such that if exercised, the Company will receive a payment equal to 3-months GBP-LIBOR on a notional amount equal to the hedged notional amount net of a fixed strike price. Each interest rate reset date, the Company will elect to exercise the Caplet or let it expire. The potential cash flows from each Caplet are expected to offset any variability in the cash flows of the interest payments to the extent GBP-LIBOR exceeds the strike price of the Caplets. The Company expects the hedge relationship to be highly effective and designates the 2018 Caps as cash flow hedge instruments.

The following table summarizes the effects of derivatives in cash flow hedging relationships designated as hedging instruments on the Company’s consolidated statements of income for the years ended December 31, 2018 and 2017 (in thousands):



	Gain (Loss) Recognized in OCI					Location of Gain (Loss) Reclassified from OCI into Income	Gain (Loss) Reclassified from OCI into Income
	2018			2017		Location of Gain (Loss) Reclassified from OCI into Income	2018			2017
Foreign currency exchange contracts	$	(1,253	)	$	2,302	Salaries and employee benefits	$	794		$	1,280
Foreign currency exchange contracts	(100		)	310		General and administrative expenses	2			76
Interest rate swap agreements	(5,228		)	9		Interest expense	(384		)	(110		)
Interest rate cap contracts	(643		)	—		Interest expense	—			—

Derivatives Not Designated as Hedging Instruments

In 2016, the Company began entering into currency exchange forward contracts to reduce the effects of currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally mature within one to three months and are not designated as hedge instruments for accounting purposes. The Company continues to monitor the level of exposure of the foreign currency exchange risk and may enter into additional short-term forward contracts on an ongoing basis. The gains or losses on these derivative contracts are recognized in other income or expense based on the changes in fair value.

On May 8, 2018, in anticipation of the completion of the Cabot Transaction, Encore entered into a foreign exchange forward contract with a notional amount of £176.0 million, which was approximately the amount of cash consideration for the Cabot Transaction. The forward contract settled on August 3, 2018 at a total loss of $9.3 million. This loss was substantially offset by a decrease in the final purchase price in U.S. dollars for the Cabot Transaction.

The following table summarizes the effects of derivatives not designated as hedging instruments on the Company’s consolidated statements of income for the years ended December 31, 2018 and 2017 (in thousands):



Derivatives Not Designated as Hedging Instruments	Location of Derivative Gain (Loss) Recognized in Income	Amount of Derivative Gain (Loss) Recognized in Income
Derivatives Not Designated as Hedging Instruments	Location of Derivative Gain (Loss) Recognized in Income	2018			2017		2016
Foreign currency exchange contracts	Other (expense) income	$	(9,221	)	$	1,755	$	8,248
Interest rate cap contracts	Interest expense	(1,568		)	2,026		—
Interest rate swap agreements	Interest expense	—			110		144