Financial Instruments and Other Inventory Positions Owned and Financial Instruments and Other Inventory Positions Sold, but Not Yet Purchased



	September 30,		December 31,
(Dollars in thousands)	2017		2016
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	66,904	$	6,363
Convertible securities	70,900		103,486
Fixed income securities	27,480		21,018
Municipal securities:
Taxable securities	37,073		63,090
Tax-exempt securities	374,348		559,329
Short-term securities	177,873		35,175
Mortgage-backed securities	4,321		5,638
U.S. government agency securities	300,832		205,685
U.S. government securities	17,205		29,970
Derivative contracts	22,392		29,217
Total financial instruments and other inventory positions owned	1,099,328		1,058,971

Less noncontrolling interests (1)	—		(57,700		)
	$	1,099,328	$	1,001,271

Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	100,403	$	89,453
Fixed income securities	21,149		17,324
U.S. government agency securities	26,703		6,723
U.S. government securities	203,995		180,650
Derivative contracts	5,485		5,207
Total financial instruments and other inventory positions sold, but not yet purchased	357,735		299,357

Less noncontrolling interests (2)	—		(631		)
	$	357,735	$	298,726


(1)	Noncontrolling interests attributable to third party ownership in a consolidated municipal bond fund consist of $1.3 million of taxable municipal securities, $55.2 million of tax-exempt municipal securities, and $1.2 million of derivative contracts as of December 31, 2016.


(2)	Noncontrolling interests attributable to third party ownership in a consolidated municipal bond fund consist of U.S. government securities as of December 31, 2016.

At September 30, 2017 and December 31, 2016, financial instruments and other inventory positions owned in the amount of $335.4 million and $594.4 million, respectively, had been pledged as collateral for short-term financings and repurchase agreements.

Financial instruments and other inventory positions sold, but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price, thereby creating a liability to purchase the security in the market at prevailing prices. The Company is obligated to acquire the securities sold short at prevailing market prices, which may exceed the amount reflected on the consolidated statements of financial condition. The Company economically hedges changes in the market value of its financial instruments and other inventory positions owned using inventory positions sold, but not yet purchased, interest rate derivatives, credit default swap index contracts, U.S. treasury bond futures and exchange traded options.

Derivative Contract Financial Instruments

The Company uses interest rate swaps, interest rate locks, credit default swap index contracts, U.S. treasury bond futures and equity option contracts as a means to manage risk in certain inventory positions. The Company also enters into interest rate swaps to facilitate customer transactions. The following describes the Company’s derivatives by the type of transaction or security the instruments are economically hedging.

Customer matched-book derivatives: The Company enters into interest rate derivative contracts in a principal capacity as a dealer to satisfy the financial needs of its customers. The Company simultaneously enters into an interest rate derivative contract with a third party for the same notional amount to hedge the interest rate and credit risk of the initial client interest rate derivative contract. In certain limited instances, the Company has only hedged interest rate risk with a third party, and retains uncollateralized credit risk as described below. The instruments use interest rates based upon either the London Interbank Offer Rate ("LIBOR") index or the Securities Industry and Financial Markets Association ("SIFMA") index.

Trading securities derivatives: The Company enters into interest rate derivative contracts and uses U.S. treasury bond futures to hedge interest rate and market value risks associated with its fixed income securities. These instruments use interest rates based upon either the Municipal Market Data ("MMD") index, LIBOR or the SIFMA index. The Company also enters into credit default swap index contracts to hedge credit risk associated with its taxable fixed income securities and option contracts to hedge market value risk associated with its convertible securities.

Derivatives are reported on a net basis by counterparty (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of offset exists and on a net basis by cross product when applicable provisions are stated in master netting agreements. Cash collateral received or paid is netted on a counterparty basis, provided a legal right of offset exists. The total absolute notional contract amount, representing the absolute value of the sum of gross long and short derivative contracts, provides an indication of the volume of the Company's derivative activity and does not represent gains and losses. The following table presents the gross fair market value and the total absolute notional contract amount of the Company's outstanding derivative instruments, prior to counterparty netting, by asset or liability position:



	September 30, 2017						December 31, 2016
(Dollars in thousands)	Derivative		Derivative		Notional		Derivative		Derivative		Notional
Derivative Category	Assets (1)		Liabilities (2)		Amount		Assets (1)		Liabilities (2)		Amount
Interest rate
Customer matched-book	$	270,149	$	255,102	$	3,178,725	$	288,955	$	272,819	$	3,330,207
Trading securities	686		4,456		345,850		13,952		1,707		423,550
Credit default swap index
Trading securities	—		—		—		—		127		7,470
	$	270,835	$	259,558	$	3,524,575	$	302,907	$	274,653	$	3,761,227


(1)	Derivative assets are included within financial instruments and other inventory positions owned on the consolidated statements of financial condition.


(2)	Derivative liabilities are included within financial instruments and other inventory positions sold, but not yet purchased on the consolidated statements of financial condition.

The Company’s derivative contracts do not qualify for hedge accounting, therefore, unrealized gains and losses are recorded on the consolidated statements of operations. The gains and losses on the related economically hedged inventory positions are not disclosed below as they are not in qualifying hedging relationships. The following table presents the Company’s unrealized gains/(losses) on derivative instruments:



		Three Months Ended						Nine Months Ended
(Dollars in thousands)		September 30,						September 30,
Derivative Category	Operations Category	2017			2016			2017			2016
Interest rate derivative contract	Investment banking	$	(300	)	$	(1,901	)	$	(1,076	)	$	(3,953	)
Interest rate derivative contract	Institutional brokerage	1,627			8,438			(16,028		)	819
Credit default swap index contract	Institutional brokerage	4,304			74			4,482			3,958
Futures and equity option derivative contracts	Institutional brokerage	—			107			—			255
		$	5,631		$	6,718		$	(12,622	)	$	1,079

Credit risk associated with the Company’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. Credit exposure associated with the Company’s derivatives is driven by uncollateralized market movements in the fair value of the contracts with counterparties and is monitored regularly by the Company’s financial risk committee. The Company considers counterparty credit risk in determining derivative contract fair value. The majority of the Company’s derivative contracts are substantially collateralized by its counterparties, who are major financial institutions. The Company has a limited number of counterparties who are not required to post collateral. Based on market movements, the uncollateralized amounts representing the fair value of the derivative contract can become material, exposing the Company to the credit risk of these counterparties. As of September 30, 2017, the Company had $20.8 million of uncollateralized credit exposure with these counterparties (notional contract amount of $181.8 million), including $15.4 million of uncollateralized credit exposure with one counterparty.