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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.