Derivatives and Hedging

Legg Mason uses currency forwards to economically hedge the risk of movements in exchange rates, primarily between the U.S. dollar, British pound, Australian dollar, Singapore dollar, Japanese yen, and euro. All derivative transactions for which Legg Mason has certain legally enforceable rights of setoff are governed by International Swaps and Derivative Association ("ISDA") Master Agreements. For these derivative transactions, Legg Mason has one ISDA Master Agreement with each of the significant counterparties, which covers transactions with that counterparty. Each of the respective ISDA agreements provides for settlement netting and close-out netting between Legg Mason and that counterparty, which are legally enforceable rights to setoff. Other assets recorded in the Consolidated Balance Sheets as of June 30, 2018 and March 31, 2018, were $7,296 and $4,904, respectively. Other liabilities recorded in the Consolidated Balance Sheets as of June 30, 2018 and March 31, 2018, were $3,512 and $6,446, respectively.

Legg Mason also uses market hedges on certain seed capital investments by entering into futures contracts to sell index funds that benchmark the hedged seed capital investments.

Legg Mason has entered into various total return swap arrangements with financial intermediaries with respect to two Legg Mason sponsored ETFs, which resulted in investments by each of the financial intermediaries in the respective ETF. Under the terms of each of the total return swap arrangements, Legg Mason receives the related investment gains and losses on the underlying shares of the ETF and pays a floating rate on the value of the underlying shares. Each of the total return swap arrangements allows either party to terminate all or part of the arrangement and provides for automatic termination upon occurrence of certain events. Each financial intermediary counterparty may hedge its total return swap position through an investment in the ETF and the financial intermediaries purchased interests in the respective Legg Mason ETF on the date of the transactions.

The terms of the total return swap arrangements, aggregate counterparty investment in the related ETF on the date of each transaction, and the aggregate notional amount for the total return swaps outstanding as of June 30, 2018, were as follows:



Transaction Date	Expiration Date	Aggregate Counterparty Initial Investment in ETF		Floating Rate	Aggregate Notional Amount as of June 30, 2018
May 24, 2018	May 2019	$	4,348	Three-month LIBOR plus 1.35%	$	4,388
May 23, 2018	May 2019	5,573		Three-month LIBOR plus 1.6%	5,573
April 24, 2018	April 2019	5,686		Three-month LIBOR plus 1.6%	5,686
July 26, 2017	July 2018	23,096		Three-month LIBOR plus 1.6%	22,680
		$	38,703		$	38,327

As further discussed in Notes 2 and 14, the total return swap arrangements create variable interests in the underlying funds for Legg Mason, and it is deemed to be the primary beneficiary. Accordingly, Legg Mason consolidates these ETF products. In connection with these arrangements, Legg Mason executed futures contracts with notional amounts totaling $38,234 as of June 30, 2018 to partially hedge the gains and losses recognized on the total return swaps.

Legg Mason has not designated any derivatives as hedging instruments for accounting purposes during the periods ended June 30, 2018 or 2017. In addition to the total return swap arrangements and the related futures contracts discussed above, as of June 30, 2018, Legg Mason had open currency forward contracts with aggregate notional amounts totaling $379,522, and open futures contracts relating to seed capital investments with aggregate notional amounts totaling $128,283. With the exception of the total return swap arrangements and related futures contracts, these amounts are representative of the level of non-hedge designation derivative activity throughout the three months ended June 30, 2018 and 2017. As of June 30, 2018, the weighted-average remaining contract terms for currency forward contracts was eight months and for futures contracts relating to seed capital investments was three months.

The following table presents the derivative assets and related offsets, if any, as of June 30, 2018:



								Gross amounts not offset in the Balance Sheet
	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet			Net amount of derivative assets presented in the Balance Sheet		Financial instruments		Cash collateral		Net amount as of June 30, 2018

Derivative instruments not designated as hedging instruments
Currency forward contracts	$	2,670	$	(1,000	)	$	1,670	$	—	$	—	$	1,670
Futures contracts relating to:
Seed capital investments	—		—			—		3,862		1,350		5,212
Total return swaps	—		—			—		1,034		551		1,585
Total futures contracts	—		—			—		4,896		1,901		6,797
Total return swaps	—		—			—		730		3,250		3,980
Total derivative instruments not designated as hedging instruments	$	2,670	$	(1,000	)	$	1,670	$	5,626	$	5,151	$	12,447

The following table presents the derivative liabilities and related offsets, if any, as of June 30, 2018:



									Gross amounts not offset in the Balance Sheet
	Gross amounts of recognized liabilities			Gross amounts offset in the Balance Sheet		Net amount of derivative liabilities presented in the Balance Sheet			Financial instruments		Cash collateral		Net amount as of June 30, 2018
Currency forward contracts not designated as hedging instruments	$	(6,638	)	$	3,126	$	(3,512	)	$	—	$	—	$	(3,512	)

The following table presents the derivative assets and related offsets, if any, as of March 31, 2018:



								Gross amounts not offset in the Balance Sheet
	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet			Net amount of derivative assets presented in the Balance Sheet		Financial instruments		Cash collateral		Net amount as of March 31, 2018

Derivative instruments not designated as hedging instruments
Currency forward contracts	$	7,997	$	(3,177	)	$	4,820	$	—	$	—	$	4,820
Futures contracts relating to seed capital investments	—		—			—		84		1,283		1,367
Total derivative instruments not designated as hedging instruments	$	7,997	$	(3,177	)	$	4,820	$	84	$	1,283	$	6,187

The following table presents the derivative liabilities and related offsets, if any, as of March 31, 2018:



									Gross amounts not offset in the Balance Sheet
	Gross amounts of recognized liabilities			Gross amounts offset in the Balance Sheet		Net amount of derivative liabilities presented in the Balance Sheet			Financial instruments			Cash collateral		Net amount as of March 31, 2018

Derivative instruments not designated as hedging instruments
Currency forward contracts	$	(532	)	$	223	$	(309	)	$	—		$	—	$	(309	)
Futures contracts relating to:
Seed capital investments	—			—		—			(2,875		)	9,214		6,339
Total return swaps	—			—		—			(1,029		)	3,201		2,172
Total futures contracts	—			—		—			(3,904		)	12,415		8,511
Total return swaps	—			—		—			(2,233		)	5,637		3,404
Total derivative instruments not designated as hedging instruments	$	(532	)	$	223	$	(309	)	$	(6,137	)	$	18,052	$	11,606

The following table presents gains (losses) recognized in the Consolidated Statements of Income on derivative instruments. As described above, the currency forward contracts and futures and forward contracts for seed capital investments included below are economic hedges of interest rate and market risk of certain operating and investing activities of Legg Mason, including foreign exchange risk on acquisition contingent consideration. Gains and losses on these derivative instruments substantially offset gains and losses of the economically hedged items.



		Three Months Ended June 30,
		2018			2017
	Income Statement Classification	Gains		Losses	Gains	Losses

Derivatives not designated as hedging instruments
Currency forward contracts relating to:
Operating activities	Other expense	$	4,620	$(10,238)	$4,712	$(2,572)
Seed capital investments	Other non-operating income (expense)	4,128		(628)	411	(1,049)
Futures contracts relating to:
Seed capital investments	Other non-operating income (expense)	4,648		(4,115)	848	(5,500)
Total return swaps	Other non-operating income (expense)	1,042		(2,330)	267	—
Total return swaps	Other non-operating income (expense)	1,698		—	—	(107)
Total gain (loss) from derivatives not designated as hedging instruments		$	16,136	$(17,311)	$6,238	$(9,228)