Derivatives and Hedging

3 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging

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 legally enforceable settlement netting and close-out netting between Legg Mason and that counterparty. Other assets recorded in the Consolidated Balance Sheets as of June 30, 2020 and March 31, 2020, were $4,173 and $4,716, respectively. Other liabilities recorded in the Consolidated Balance Sheets as of June 30, 2020 and March 31, 2020, were $1,557 and $13,872, 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.

Legg Mason has not designated any derivatives as hedging instruments for accounting purposes during the periods ended June 30, 2020, March 31, 2020 or June 30, 2019. As of June 30, 2020, Legg Mason had open currency forward contracts with aggregate notional amounts totaling $309,365, and open futures contracts relating to seed capital investments with aggregate notional amounts totaling $85,122. With the exception of the total return swap arrangement discussed below, these amounts are representative of the level of non-hedge designation derivative activity throughout the three months ended June 30, 2020 and 2019. As of June 30, 2020, the weighted-average remaining contract terms for currency forward contracts was seven months and for 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 related Legg Mason ETF on the date of the transactions. The aggregate notional amount for the total return swap outstanding as of June 30, 2020 was $1,505, with a weighted-average remaining contract term of seven months. The floating rate paid on the value of the underlying securities for the total return swap arrangement outstanding as of June 30, 2020 was three-month LIBOR plus 1.6%.

As further discussed in Note 16, 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.

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 June 30, 2020
Derivative instruments not designated as hedging instruments
Currency forward contracts	$	6,282	$	(2,607	)	$	3,675	$	—	$	—	$	3,675
Futures contracts relating to seed capital investments	—		—			—		338		2,632		2,970
Total return swaps	—		—			—		160		120		280
Total derivative instruments not designated as hedging instruments	$	6,282	$	(2,607	)	$	3,675	$	498	$	2,752	$	6,925

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 June 30, 2020
Derivative instruments not designated as hedging instruments
Currency forward contracts	$	497	$	(1,574	)	$	(1,077	)	$	—		$	—	$	(1,077	)
Futures contracts relating to seed capital investments	—		—			—			(480		)	4,944		4,464
Total derivative instruments not designated as hedging instruments	$	497	$	(1,574	)	$	(1,077	)	$	(480	)	$	4,944	$	3,387

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, 2020
Derivative instruments not designated as hedging instruments
Currency forward contracts	$	4,493	$	(1,709	)	$	2,784	$	—	$	—	$	2,784
Futures contracts relating to:
Seed capital investments	—		—			—		1,802		2,206		4,008
Total return swaps	—		—			—		130		158		288
Total futures contracts	—		—			—		1,932		2,364		4,296
Total derivative instruments not designated as hedging instruments	$	4,493	$	(1,709	)	$	2,784	$	1,932	$	2,364	$	7,080

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, 2020
Derivative instruments not designated as hedging instruments
Currency forward contracts	$	(11,482	)	$	4,368	$	(7,114	)	$	—		$	—	$	(7,114	)
Futures contracts relating to:
Seed capital investments	—			—		—			(3,203		)	7,326		4,123
Total return swaps	—			—		—			(360		)	754		394
Total futures contracts	—			—		—			(3,563		)	8,080		4,517
Total return swaps	—			—		—			(3,195		)	4,125		930
Total derivative instruments not designated as hedging instruments	$	(11,482	)	$	4,368	$	(7,114	)	$	(6,758	)	$	12,205	$	(1,667	)

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.

		Three months ended June 30,
		2020					2019
	Income Statement Classification	Gains		Losses			Gains		Losses
Derivatives not designated as hedging instruments
Currency forward contracts relating to:
Operating activities	Other expense	$	9,260	$	(2,278	)	$	3,639	$	(5,484	)
Seed capital investments	Other non-operating income (expense)	1,570		(2,909		)	725		(564		)
Futures contracts relating to:
Seed capital investments	Other non-operating income (expense)	337		(13,789		)	311		(3,966		)
Total return swaps	Other non-operating income (expense)	—		(1,962		)	1		(803		)
Total return swaps	Other non-operating income (expense)	1,672		—			1,249		—
Total gain (loss) from derivatives not designated as hedging instruments		$	12,839	$	(20,938	)	$	5,925	$	(10,817	)