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 and Trading liabilities, 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 primarily recognized in Principal transactions 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 and our Leucadia Asset Management businesses 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 3 and 21 for additional disclosures about derivative financial 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 and similar agreements with counterparties. These agreements provide Jefferies with the ability to offset a counterparty’s rights and obligations, request additional collateral when necessary or liquidate the collateral in the event of counterparty default. See Note 10 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 June 30, 2016 and December 31, 2015. 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):



	Assets				Liabilities
	Fair Value			Number of Contracts	Fair Value			Number of Contracts
June 30, 2016
Interest rate contracts	$	4,011,520		76,709	$	3,963,945		98,886
Foreign exchange contracts	398,657			8,533	417,400			7,926
Equity contracts	916,766			3,252,725	1,098,276			2,792,838
Commodity contracts	10,397			2,784	865			1,687
Credit contracts: centrally cleared swaps	7,594			94	7,219			12
Credit contracts: other credit derivatives	16,930			82	37,268			95
Total	5,361,864				5,524,973
Counterparty/cash-collateral netting	(5,030,887		)		(5,118,214		)
Total per Consolidated Statement of Financial Condition	$	330,977			$	406,759

December 31, 2015
Interest rate contracts	$	2,910,093		56,748	$	2,849,958		74,904
Foreign exchange contracts (1)	453,527			8,089	466,021			7,376
Equity contracts	1,017,611			3,057,754	1,094,597			2,947,416
Commodity contracts (1)	27,590			2,896	5,510			2,001
Credit contracts: centrally cleared swaps	2,447			299	841			44
Credit contracts: other credit derivatives	16,977			100	59,314			135
Total	4,428,245				4,476,241
Counterparty/cash-collateral netting	(4,165,446		)		(4,257,998		)
Total per Consolidated Statement of Financial Condition	$	262,799			$	218,243


(1)	Commodity contracts increased in assets by a fair value of $19.3 million and by 29 contracts and in liabilities by a fair value of $4.6 million and by 28 contracts with corresponding decreases in foreign exchange contracts from those amounts previously reported to correct for the classification of certain contracts. The total amount of contracts remained unchanged.

The following table presents unrealized and realized gains (losses) on derivative contracts as reflected in the Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 (in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2016			2015			2016			2015
Interest rate contracts	$	(5,877	)	$	18,064		$	(74,390	)	$	(24,728	)
Foreign exchange contracts	4,067			8,352			4,903			23,524
Equity contracts	(97,570		)	(111,682		)	(321,852		)	(40,641		)
Commodity contracts	(3,155		)	5,746			(2,426		)	20,237
Credit contracts	10,779			9,805			(196		)	3,763
Total	$	(91,756	)	$	(69,715	)	$	(393,961	)	$	(17,845	)

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 June 30, 2016 (in thousands):



	OTC Derivative Assets (1) (2) (3)
	0-12 Months		1-5 Years		Greater Than 5 Years		Cross- Maturity Netting (4)			Total

Commodity swaps, options and forwards	$	1,654	$	8,002	$	—	$	—		$	9,656
Equity swaps and options	33,631		2,646		—		—			36,277
Credit default swaps	—		6,362		1,009		(1,194		)	6,177
Total return swaps	22,128		5,101		—		(635		)	26,594
Foreign currency forwards, swaps and options	86,700		12,391		—		(5,083		)	94,008
Interest rate swaps, options and forwards	55,585		215,033		59,686		(101,651		)	228,653
Total	$	199,698	$	249,535	$	60,695	$	(108,563	)	401,365
Cross product counterparty netting										(1,148		)

Total OTC derivative assets included in Trading assets										$	400,217


(1)	At June 30, 2016, we held exchange traded derivative assets and other credit agreements with a fair value of $53.2 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 June 30, 2016 cash collateral received was $139.5 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)
	0-12 Months		1-5 Years		Greater Than 5 Years		Cross-Maturity Netting (4)			Total
Commodity swaps, options and forwards	$	—	$	—	$	—	$	—		$	—
Equity swaps and options	3,957		18,813		—		—			22,770
Credit default swaps	—		2,851		11,461		(1,194		)	13,118
Total return swaps	8,721		2,738		—		(635		)	10,824
Foreign currency forwards, swaps and options	109,643		8,191		—		(5,083		)	112,751
Fixed income forwards	2,053		1,207		—		—			3,260
Interest rate swaps, options and forwards	33,749		100,594		153,026		(101,651		)	185,718
Total	$	158,123	$	134,394	$	164,487	$	(108,563	)	348,441
Cross product counterparty netting										(1,148		)

Total OTC derivative liabilities included in Trading liabilities										$	347,293


(1)	At June 30, 2016, we held exchange traded derivative liabilities and other credit agreements with a fair value of $270.4 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 June 30, 2016, cash collateral pledged was $226.8 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 June 30, 2016, 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	$	182,327
BBB- to BBB+	54,977
BB+ or lower	101,674
Unrated	61,239
Total	$	400,217


(1)	We utilize internal credit ratings determined by the Jefferies Risk Management department. 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 June 30, 2016 and December 31, 2015 is $64.6 million and $114.5 million, respectively, for which Jefferies has posted collateral of $58.6 million and $97.2 million, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on June 30, 2016 and December 31, 2015, Jefferies would have been required to post an additional $2.9 million and $19.7 million, respectively, of collateral to its counterparties.

Other Derivatives

National Beef uses futures contracts in order to reduce its exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to the delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. National Beef accounts for the futures contracts at fair value. Firm commitments for sales are treated as normal sales and therefore not marked to market. Certain firm commitments to purchase cattle, are marked to market when a price has been agreed upon, otherwise they are treated as normal purchases and, therefore, not marked to market. The gains and losses associated with the change in fair value of the futures contracts and offsetting gains and losses associated with changes in the market value of certain of the firm purchase commitments are recorded to income and expense in the period of change.

Vitesse Energy uses call and put options in order to reduce exposure to future oil price fluctuations. Vitesse Energy accounts for the derivative instruments at fair value. The gains and losses associated with the change in fair value of the derivatives are recorded in income.