Derivative Financial Instruments

9 Months Ended

Sep. 30, 2014

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

Note 5. Derivative Financial Instruments

Off-Balance Sheet Risk

Jefferies has contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to resell, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the fair values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a significant effect upon our consolidated financial statements.

Derivative Financial Instruments

Derivative activities are recorded at fair value in the Consolidated Statements of Financial Condition in Trading assets Derivatives and Trading liabilities Derivatives, net of cash paid or received under credit support agreements and on a net counterparty basis when a legal right to offset exists under a master netting agreement. Net realized and unrealized gains and losses are recognized in the Consolidated Statements of Operations on a trade date basis and as a component of cash flows from operating activities in the Consolidated Statements of Cash Flows. Acting in a trading capacity, Jefferies may enter into derivative transactions to satisfy the needs of its clients and to manage its own exposure to market and credit risks resulting from trading activities. (See Notes 4 and 21 for additional disclosures about derivative instruments.)

Derivatives are subject to various risks similar to other financial instruments, including market, credit and operational risk. The risks of derivatives should not be viewed in isolation, but rather should be considered on an aggregate basis along with our other trading-related activities. Jefferies manages the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of its firm wide risk management policies. In connection with Jefferies derivative activities, Jefferies may enter into International Swaps and Derivative Association, Inc. (ISDA) master netting agreements or similar agreements with counterparties. These agreements provide Jefferies with the ability to offset a counterpartys rights and obligations, request additional collateral when necessary or liquidate the collateral in the event of counterparty default. See Note 11 for additional information with respect to financial statement offsetting.

The following tables present the fair value and related number of derivative contracts categorized by type of derivative contract as reflected in the Consolidated Statements of Financial Condition at September 30, 2014 and December 31, 2013. The fair value of assets/liabilities related to derivative contracts represents our receivable/payable for derivative financial instruments, gross of counterparty netting and cash collateral received and pledged (in thousands, except contract amounts):

	September 30, 2014
		Assets				Liabilities
				Number of				Number of
		Fair Value		Contracts		Fair Value		Contracts
Interest rate contracts	$	1,829,309		59,651	$	1,823,874		83,274
Foreign exchange contracts		732,665		28,336		655,320		35,409
Equity contracts		708,905		1,889,845		679,152		1,886,849
Commodity contracts		179,957		1,122,124		169,710		1,127,472
Credit contracts: centrally cleared swaps		55,293		51		58,196		52
Credit contracts: other credit derivatives		1,365		15		20,888		29
Total		3,507,494				3,407,140
Counterparty/cash-collateral netting		(3,148,819	)			(3,140,135	)
Total per Consolidated Statement of Financial Condition	$	358,675			$	267,005

	December 31, 2013
		Assets				Liabilities
				Number of				Number of
		Fair Value		Contracts		Fair Value		Contracts
Interest rate contracts	$	1,165,977		63,967	$	1,131,166		77,338
Foreign exchange contracts		653,772		118,707		693,658		112,417
Equity contracts		501,784		1,742,343		474,985		1,800,603
Commodity contracts		141,280		797,529		173,119		788,717
Credit contracts: centrally cleared swaps		49,531		49		51,632		46
Credit contracts: other credit derivatives		2,339		16		8,130		19
Total		2,514,683				2,532,690
Counterparty/cash-collateral netting		(2,253,589	)			(2,352,611	)
Total per Consolidated Statement of Financial Condition	$	261,094			$	180,079

The following table presents unrealized and realized gains (losses) on derivative contracts for the three and nine months ended September 30, 2014 and 2013 (in thousands):

		For the Three Month						For the Nine Month
		Period Ended September 30,						Period Ended September 30,
		2014			2013			2014			2013
Interest rate contracts	$	(3,803	)	$	130,178		$	(46,376	)	$	177,796
Foreign exchange contracts		6,697			(3,930	)		8,294			(25	)
Equity contracts		(49,422	)		25,509			(220,774	)		37,588
Commodity contracts		(4,991	)		15,080			32,989			36,593
Credit contracts		(1,330	)		(904	)		(17,318	)		(13,425	)
Total	$	(52,849	)	$	165,933		$	(243,185	)	$	238,527

OTC Derivatives. The following tables set forth by remaining contract maturity the fair value of OTC derivative assets and liabilities as reflected in the Consolidated Statement of Financial Condition at September 30, 2014 (in thousands):

	OTC Derivative Assets (1) (2) (3)
								Cross-
					Greater Than			Maturity
		0-12 Months		1-5 Years		5 Years		Netting (4)			Total
Commodity swaps, options and forwards	$	62,219	$	7,459	$	-	$	(2,344	)	$	67,334
Equity swaps and options		1,980		36,355		5,911		-			44,246
Total return swaps		2,816		2		-		-			2,818
Foreign currency forwards, swaps and options		179,297		31,983		3,255		(16,960	)		197,575
Interest rate swaps, options and forwards		49,095		107,025		152,536		(62,126	)		246,530
Total	$	295,407	$	182,824	$	161,702	$	(81,430	)		558,503
Cross product counterparty netting											(8,871	)
Total OTC derivative assets included in
Trading assets										$	549,632

(1)	At September 30, 2014, we held exchange traded derivative assets and other credit agreements with a fair value of $69.0 million, which are not included in this table.
(2)	OTC derivative assets in the table above are gross of collateral received. OTC derivative assets are recorded net of collateral received in the Consolidated Statements of Financial Condition. At September 30, 2014, cash collateral received was $260.0 million.
(3)	Derivative fair values include counterparty netting within product category.
(4)	Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.

	OTC Derivative Liabilities (1) (2) (3)
								Cross-
					Greater Than			Maturity
		0-12 Months		1-5 Years	5 Years			Netting (4)			Total
Commodity swaps, options and forwards	$	58,743	$	7,042	$	-	$	(2,344	)	$	63,441
Credit default swaps		62		7,892		747		-			8,701
Equity swaps and options		-		9,977		58,712		-			68,689
Total return swaps		1,704		-		-		-			1,704
Foreign currency forwards, swaps and options		106,582		27,173		3,084		(16,960	)		119,879
Interest rate swaps, options and forwards		39,104		91,001		177,410		(62,126	)		245,389
Total	$	206,195	$	143,085	$	239,953	$	(81,430	)		507,803
Cross product counterparty netting											(8,871	)
Total OTC derivative liabilities included in
Trading liabilities										$	498,932

(1)	At September 30, 2014, we held exchange traded derivative liabilities and other credit agreements with a fair value of $19.2 million, which are not included in this table.
(2)	OTC derivative liabilities in the table above are gross of collateral pledged. OTC derivative liabilities are recorded net of collateral pledged in the Consolidated Statements of Financial Condition. At September 30, 2014, cash collateral pledged was $251.3 million.
(3)	Derivative fair values include counterparty netting within product category.
(4)	Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.

At September 30, 2014, the counterparty credit quality with respect to the fair value of our OTC derivative assets was as follows (in thousands):

Counterparty credit quality (1):
A- or higher	$	326,452
BBB- to BBB+		69,223
BB+ or lower		54,989
Unrated		98,968
Total	$	549,632

(1) We utilize internal credit ratings determined by Jefferies Risk Management. Credit ratings determined by Risk Management use methodologies that produce ratings generally consistent with those produced by external rating agencies.

Contingent Features

Certain of Jefferies derivative instruments contain provisions that require their debt to maintain an investment grade credit rating from each of the major credit rating agencies. If Jefferies debt were to fall below investment grade, it would be in violation of these provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on Jefferies derivative instruments in liability positions. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a liability position at September 30, 2014 and December 31, 2013 is $85.8 million and $170.2 million, respectively, for which Jefferies has posted collateral of $65.1 million and $127.7 million, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2014 and December 31, 2013, Jefferies would have been required to post an additional $23.8 million and $49.4 million, respectively, of collateral to its counterparties.