Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk

The Company is party to certain financial instruments with off-balance sheet risk in the normal course of its business. The Company has sold financial instruments that it does not currently own and will therefore be obliged to purchase such financial instruments at a future date. The Company has recorded these obligations in the consolidated financial statements as of September 30, 2017 at the fair values of the related financial instruments. The Company will incur losses if the fair value of the underlying financial instruments increases subsequent to September 30, 2017. The total of $717.6 million as of September 30, 2017 includes $317.0 million for derivative contracts, which represent a liability to the Company based on their fair values as of September 30, 2017.

Derivatives

The Company utilizes derivative products in its trading capacity as a dealer in order to satisfy customer needs and mitigate risk. The Company manages risks from both derivatives and non-derivative cash instruments on a consolidated basis. The risks of derivatives should not be viewed in isolation, but in aggregate with the Company’s other trading activities. The Company’s derivative positions are included in the consolidating balance sheets in ‘deposits with and receivables from broker-dealers, clearing organizations, and counterparties’, ‘financial instruments owned and sold, not yet purchased, at fair value’ and ‘payables to broker-dealers, clearing organizations and counterparties’.

The Company employs an interest rate risk management strategy using derivative financial instruments in the form of interest rate swaps as well as outright purchases of medium-term U.S. Treasury notes to manage a portion of the aggregate interest rate position. The Company’s objective when using interest rate swaps under the strategy, is to invest certain amounts of customer deposits in high quality, short-term investments and swap the resulting variable interest earnings into medium-term interest earnings. When used, the risk mitigation of these interest rate swaps are not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC, and as a result are recorded at fair value, with changes in the fair value of the interest rate swaps recorded within ‘trading gains, net’ in the consolidated income statements. At September 30, 2016, the Company had $375 million in notional principal of interest rate swaps outstanding with a weighted-average life of 15 months. During the year ended September 30, 2017, the Company settled these interest rate swaps in advance of their original maturity date.

Listed below are the fair values of the Company’s derivative assets and liabilities as of September 30, 2017 and 2016. Assets represent net unrealized gains and liabilities represent net unrealized losses.



	September 30, 2017						September 30, 2016
(in millions)	Assets ⁽¹⁾			Liabilities ⁽¹⁾			Assets ⁽¹⁾			Liabilities ⁽¹⁾
Derivative contracts not accounted for as hedges:
Exchange-traded commodity derivatives	$	2,094.2		$	1,975.0		$	2,022.1		$	1,920.5
OTC commodity derivatives	1,084.0			1,110.3			1,217.0			1,188.9
Exchange-traded foreign exchange derivatives	66.0			52.0			12.2			7.5
OTC foreign exchange derivatives	618.5			609.8			346.5			290.2
Exchange-traded interest rate derivatives	228.4			203.6			78.7			120.5
Equity index derivatives	221.3			245.4			39.1			50.3
TBA and forward settling securities	8.8			4.9			0.3			2.6
Gross fair value of derivative contracts	4,321.2			4,201.0			3,715.9			3,580.5
Impact of netting and collateral	(4,205.5		)	(3,879.2		)	(3,653.5		)	(3,366.1		)
Total fair value included in ‘Deposits with and receivables from broker-dealers, clearing organizations and counterparties’	$	(46.4	)				$	(131.5	)
Total fair value included in ‘Financial instruments owned, at fair value’	$	162.1					$	193.9
Total fair value included in ‘Payables to broker-dealers, clearing organizations and counterparties				$	4.8					$	3.5
Fair value included in ‘Financial instruments sold, not yet purchased, at fair value’				$	317.0					$	210.9


(1)	As of September 30, 2017 and 2016, the Company’s derivative contract volume for open positions was approximately 6.1 million and 4.0 million contracts, respectively.

The Company’s derivative contracts are principally held in its Commodities and Risk Management Services (“Commercial Hedging”) segment. The Company assists its Commercial Hedging segment customers in protecting the value of their future production by entering into option or forward agreements with them on an OTC basis. The Company also provides its Commercial Hedging segment customers with option products, including combinations of buying and selling puts and calls. The Company mitigates its risk by generally offsetting the customer’s transaction simultaneously with one of the Company’s trading counterparties or will offset that transaction with a similar but not identical position on the exchange. The risk mitigation of these offsetting trades is not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC. These derivative contracts are traded along with cash transactions because of the integrated nature of the markets for these products. The Company manages the risks associated with derivatives on an aggregate basis along with the risks associated with its proprietary trading and market-making activities in cash instruments as part of its firm-wide risk management policies. In particular, the risks related to derivative positions may be partially offset by inventory, unrealized gains in inventory or cash collateral paid or received.

The Company transacts in derivative instruments, which consist of futures, mortgage-backed TBA securities and forward settling transactions, that are used to manage risk exposures. The fair value of these transactions is recorded in receivables or payables to broker-dealers, clearing organizations and counterparties. Realized and unrealized gains and losses on securities and derivative transactions are reflected in ‘trading gains, net’.

The Company enters into TBA securities transactions for the sole purpose of managing risk associated with the purchase of mortgage pass-through securities. TBA securities are included within payables to broker-dealers, clearing organizations and counterparties. Forward settling securities represent non-regular way securities and are included in financial instruments owned and sold. As of September 30, 2017, these transactions are summarized as follows (in millions):



	Gain / (Loss)			Notional Amounts
Unrealized gain on TBA securities purchased within payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)	$	—		$	51.3
Unrealized loss on TBA securities purchased within payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)	$	(2.9	)	$	1,236.8
Unrealized gain on TBA securities sold within deposits with and receivables from broker-dealers, clearing organizations and counterparties and related notional amounts (1)	$	5.8		$	(1,881.9	)
Unrealized loss on TBA securities sold within deposits with and receivables from broker-dealers, clearing organizations and counterparties and related notional amounts (1)	$	(0.1	)	$	(404.1	)
Unrealized loss on forward settling securities purchased within payables to broker-dealers, clearing organizations and counterparties and related notional amounts	$	(2.0	)	$	882.9
Unrealized gain on forward settling securities sold within receivables from broker-dealers, clearing organizations and counterparties and related notional amounts	$	3.0		$	(590.2	)
(1) The notional amounts of these instruments reflect the extent of the Company’s involvement in TBA securities and do not represent risk of loss due to counterparty non-performance.

The following table sets forth the Company’s net gains (losses) related to derivative financial instruments for the fiscal years ended September 30, 2017, 2016, and 2015, in accordance with the Derivatives and Hedging Topic of the ASC. The net gains (losses) set forth below are included in ‘trading gains, net’ and ‘cost of sales of physical commodities’ in the consolidated income statements.



	Year Ended September 30,
(in millions)	2017			2016			2015
Commodities	$	47.3		$	41.8		$	78.6
Foreign exchange	8.7			9.7			7.5
Interest rate and equity	(0.1		)	0.8			3.2
TBA and forward settling securities	(2.5		)	(14.4		)	(5.1		)
Net gains from derivative contracts	$	53.4		$	37.9		$	84.2

Credit Risk

In the normal course of business, the Company purchases and sells financial instruments, commodities and foreign currencies as either principal or agent on behalf of its customers. If either the customer or counterparty fails to perform, the Company may be required to discharge the obligations of the nonperforming party. In such circumstances, the Company may sustain a loss if the fair value of the financial instrument or foreign currency is different from the contract value of the transaction.

The majority of the Company’s transactions and, consequently, the concentration of its credit exposure are with commodity exchanges, customers, broker-dealers and other financial institutions. These activities primarily involve collateralized and uncollateralized arrangements and may result in credit exposure in the event that a counterparty fails to meet its contractual obligations. The Company’s exposure to credit risk can be directly impacted by volatile financial markets, which may impair the ability of counterparties to satisfy their contractual obligations. The Company seeks to control its credit risk through a variety of reporting and control procedures, including establishing credit limits based upon a review of the counterparties’ financial condition and credit ratings. The Company monitors collateral levels on a daily basis for compliance with regulatory and internal guidelines and requests changes in collateral levels as appropriate.

The Company is a party to financial instruments in the normal course of its business through customer and proprietary trading accounts in exchange-traded and OTC derivative instruments. These instruments are primarily the execution of orders for commodity futures, options on futures and forward foreign currency contracts on behalf of its customers, substantially all of which are transacted on a margin basis. Such transactions may expose the Company to significant credit risk in the event margin requirements are not sufficient to fully cover losses which customers may incur. The Company controls the risks associated with these transactions by requiring customers to maintain margin deposits in compliance with individual exchange regulations and internal guidelines. The Company monitors required margin levels daily and, therefore, may require customers to deposit additional collateral or reduce positions when necessary. The Company also establishes credit limits for customers, which are monitored daily. The Company evaluates each customer’s creditworthiness on a case by case basis. Clearing, financing, and settlement activities may require the Company to maintain funds with or pledge securities as collateral with other financial institutions. Generally, these exposures to both customers and counterparties are subject to master netting, or customer agreements, which reduce the exposure to the Company by permitting receivables and payables with such customers to be offset in the event of a customer default. Management believes that the margin deposits held as of September 30, 2017 and September 30, 2016 were adequate to minimize the risk of material loss that could be created by positions held at that time. Additionally, the Company monitors collateral fair value on a daily basis and adjusts collateral levels in the event of excess market exposure.

Derivative financial instruments involve varying degrees of off-balance sheet market risk whereby changes in the fair values of underlying financial instruments may result in changes in the fair value of the financial instruments in excess of the amounts reflected in the consolidated balance sheets. Exposure to market risk is influenced by a number of factors, including the relationships between the financial instruments and the Company’s positions, as well as the volatility and liquidity in the markets in which the financial instruments are traded. The principal risk components of financial instruments include, among other things, interest rate volatility, the duration of the underlying instruments and changes in commodity pricing and foreign exchange rates. The Company attempts to manage its exposure to market risk through various techniques. Aggregate market limits have been established and market risk measures are routinely monitored against these limits.