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. Other assets recorded in the Consolidated Balance Sheets as of March 31, 2019 and 2018, were $4,183 and $4,904, respectively. Other liabilities recorded in the Consolidated Balance Sheets as of March 31, 2019 and 2018, were $7,579 and $6,446, respectively.

Legg Mason also uses market hedges on certain seed capital investments by entering into futures contracts to sell index funds and treasuries that benchmark the hedged seed capital investments and has entered into total return swap arrangements with respect to certain Legg Mason sponsored ETFs, as further discussed below.

With the exception of the two interest rate swap contracts discussed in Note 6, Legg Mason has not designated any derivatives as hedging instruments for accounting purposes during the years ended March 31, 2019, 2018, or 2017. As of March 31, 2019, Legg Mason had open currency forward contracts with aggregate notional amounts totaling $408,841, and open futures contracts relating to seed capital investments with aggregate notional amounts totaling $128,065. With the exception of the total return swap arrangements and related futures contracts below, these amounts are representative of the level of non-hedge designation derivative activity throughout the years ended March 31, 2019, 2018, and 2017. As of March 31, 2019, the weighted-average remaining contract terms for both currency forward contracts and futures contracts relating to seed capital investments was three months.

Legg Mason has entered into various total return swap arrangements with financial intermediaries with respect to certain 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 aggregate notional amount for total return swaps outstanding as of March 31, 2019 was $61,230, with a weighted-average remaining contract term of eight months. The floating rate paid on the value of the underlying securities for all total return swap arrangements outstanding as of March 31, 2019 was three-month LIBOR plus 1.6%.

As further discussed in Notes 1 and 19, the total return swap arrangements create variable interests in the underlying funds for Legg Mason, and, if significant, Legg Mason is deemed to be the primary beneficiary. Accordingly, Legg Mason may consolidate ETF products with significant open total return swap arrangements. In connection with the total return swap arrangements, Legg Mason executed futures contracts with notional amounts totaling $37,027 as of March 31, 2019 to partially hedge the gains and losses recognized on the total return swaps.

The following table presents the derivative assets and related offsets, if any:



								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, 2019

Derivative instruments not designated as hedging instruments
Currency forward contracts	$	3,997	$	(1,874	)	$	2,123	$	—	$	—	$	2,123
Total return swaps	—		—			—		2,060		2,310		4,370
Total derivative instruments not designated as hedging instruments	$	3,997	$	(1,874	)	$	2,123	$	2,060	$	2,310	$	6,493

The following table presents the derivative liabilities and related offsets, if any:



										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, 2019

Derivative instruments not designated as hedging instruments
Currency forward contracts	$	(7,465	)	$	2,094	$	(5,371	)		$	—		$	—	$	(5,371	)
Futures contracts relating to:
Seed capital investments	—			—		—				(1,798		)	7,640		5,842
Total return swaps	—			—		—				(410		)	1,104		694
Total future contracts	—			—		—			—	(2,208		)	8,744		6,536
Total derivative instruments not designated as hedging instruments	$	(7,465	)	$	2,094	$	(5,371	)		$	(2,208	)	$	8,744	$	1,165

The following table presents the derivative assets and related offsets, if any:



								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
Total return swaps	—		—			—		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:



									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 (Loss) 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.



		Years Ended March 31,
		2019					2018					2017
	Income Statement Classification	Gains		Losses			Gains		Losses			Gains		Losses
Derivatives not designated as hedging instruments
Currency forward contracts relating to:
Operating activities	Other expense	$	8,881	$	(17,270	)	$	13,880	$	(6,774	)	$	14,524	$	(13,098	)
Seed capital investments	Other non-operating income (expense)	4,904		(930		)	494		(2,459		)	2,681		(2,443		)
Futures contracts relating to:
Seed capital investments	Other non-operating income (expense)	17,648		(18,416		)	222		(24,025		)	2,103		(18,602		)
Total return swaps	Other non-operating income (expense)	3,116		(5,615		)	90		(8,721		)	—		—
Total return swaps	Other non-operating income (expense)	4,316		—			2,247		(1,142		)	—		—
Total gain (loss) from derivatives not designated as hedging instruments		38,865		(42,231		)	16,933		(43,121		)	19,308		(34,143		)
Derivative designated as a cash flow hedge (see Note 6)
Interest rate swap (termination)	Other non-operating income (expense)	—		—			—		—			—		(3,662		)
Interest rate swap	Interest expense	—		—			—		—			—		(764		)
Total		$	38,865	$	(42,231	)	$	16,933	$	(43,121	)	$	19,308	$	(38,569	)