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 material 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 legally enforceable right to offset exists under a master netting agreement. Predominantly, Jefferies and our Leucadia Asset Management businesses enter into derivative transactions to satisfy the needs of its clients and to manage its own exposure to market and credit risks resulting from its trading activities. In addition, Jefferies applies hedge accounting to an interest rate swap that has been designated as a fair value hedge of the changes in fair value due to the benchmark interest rate for certain fixed rate senior long-term debt. See Notes 3 and 20 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 or similar agreements with counterparties. 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 September 30, 2017 and December 31, 2016. The fair value of assets/liabilities represents our receivable/payable for derivative financial instruments, gross of counterparty netting and cash collateral received and pledged. The following tables also provide information regarding: 1) the extent to which, under enforceable master netting arrangements, such balances are presented net in our Consolidated Statements of Financial Condition as appropriate under GAAP and 2) the extent to which other rights of setoff associated with these arrangements exist and could have an effect on our financial position (in thousands, except contract amounts):



	Assets				Liabilities
	Fair Value			Number of Contracts	Fair Value			Number of Contracts
September 30, 2017
Derivatives designated as accounting hedges - interest rate contracts	$	11,654		1	$	—		—

Derivatives not designated as accounting hedges:
Interest rate contracts	$	1,777,254		17,997	$	1,698,297		42,934
Foreign exchange contracts	370,203			5,690	369,971			6,733
Equity contracts	549,030			2,199,786	1,127,705			1,849,003
Commodity contracts	5			3,673	3,543			8,727
Credit contracts	75,867			303	90,678			389
Total	2,772,359				3,290,194
Counterparty/cash-collateral netting (1)	(2,595,355		)		(2,714,115		)
Total derivatives not designated as accounting hedges	$	177,004			$	576,079

Total per Consolidated Statement of Financial Condition (2)	$	188,658			$	576,079

December 31, 2016
Derivatives not designated as accounting hedges:
Interest rate contracts	$	3,282,245		29,032	$	3,159,457		34,845
Foreign exchange contracts	529,669			7,826	516,869			8,319
Equity contracts	786,987			2,843,329	1,169,201			2,414,715
Commodity contracts	1,906			2,766	6,430			7,289
Credit contracts	26,269			311	28,065			20,084
Total	4,627,076				4,880,022
Counterparty/cash-collateral netting (1)	(4,255,998		)		(4,229,213		)
Total per Consolidated Statement of Financial Condition (2)	$	371,078			$	650,809

(1) Amounts netted include both netting by counterparty and for cash collateral paid or received.

(2) We have not received or pledged additional collateral under master netting agreements and/or other credit support agreements that is eligible to be offset beyond what has been offset in the Consolidated Statements of Financial Condition.

The following table provides information related to gains (losses) recognized in Interest expense of Jefferies in the Consolidated Statements of Operations on a fair value hedge (in thousands):



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2017			2016		2017			2016
Interest rate swaps	$	6,217		$	—	$	13,960		$	—
Long-term debt	(4,680		)	—		(9,570		)	—
Total	$	1,537		$	—	$	4,390		$	—

The following table presents unrealized and realized gains (losses) on derivative contracts which are primarily recognized in Principal transactions revenues in the Consolidated Statements of Operations, which are utilized in connection with our client activities and our economic risk management activities (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Interest rate contracts	$	(7,485	)	$	(27,354	)	$	2,555		$	(101,744	)
Foreign exchange contracts	481			11,089			3,341			15,992
Equity contracts	(142,931		)	(184,020		)	(294,635		)	(505,872		)
Commodity contracts	(3,626		)	2,777			(5,169		)	351
Credit contracts	(7,947		)	(3,616		)	6,133			(3,812		)
Total	$	(161,508	)	$	(201,124	)	$	(287,775	)	$	(595,085	)

The net gains (losses) on derivative contracts in the table above are one of a number of activities comprising Jefferies business activities and are before consideration of economic hedging transactions, which generally offset the net gains (losses) included above. Jefferies substantially mitigates its exposure to market risk on its cash instruments through derivative contracts, which generally provide offsetting revenues, and Jefferies manages the risk associated with these contracts in the context of its overall risk management framework.

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, 2017 (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	$	—	$	5	$	—	$	—		$	5
Equity swaps and options	5,117		3,204		—		—			8,321
Credit default swaps	289		3,399		7,421		(26		)	11,083
Total return swaps	11,411		5,823		—		(2,458		)	14,776
Foreign currency forwards, swaps and options	95,638		29,277		—		(14		)	124,901
Fixed income forwards	134		—		—		—			134
Interest rate swaps, options and forwards	49,714		171,691		98,719		(83,961		)	236,163
Total	$	162,303	$	213,399	$	106,140	$	(86,459	)	395,383
Cross product counterparty netting										(70,712		)
Total OTC derivative assets included in Trading assets										$	324,671


(1)	At September 30, 2017, we held exchange traded derivative assets and other credit agreements with a fair value of $21.3 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, 2017, cash collateral received was $157.3 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.



	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	$	1,072	$	—	$	—	$	—		$	1,072
Equity swaps and options	2,980		146,505		2,631		—			152,116
Credit default swaps	1,077		23,931		—		(26		)	24,982
Total return swaps	11,666		1,802		—		(2,458		)	11,010
Foreign currency forwards, swaps and options	94,182		30,561		—		(14		)	124,729
Fixed income forwards	1,145		—		—		—			1,145
Interest rate swaps, options and forwards	30,735		97,284		102,566		(83,961		)	146,624
Total	$	142,857	$	300,083	$	105,197	$	(86,459	)	461,678
Cross product counterparty netting										(70,712		)
Total OTC derivative liabilities included in Trading liabilities										$	390,966


(1)	At September 30, 2017, we held exchange traded derivative liabilities and other credit agreements with a fair value of $461.2 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, 2017, cash collateral pledged was $276.0 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.

At September 30, 2017, 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	$	143,935
BBB- to BBB+	50,742
BB+ or lower	72,249
Unrated	57,745
Total	$	324,671


(1)	Jefferies utilizes 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.

Credit Related Derivative Contracts

The external credit ratings of the underlyings or referenced assets for our written credit related derivative contracts (in millions):



	External Credit Rating
	Investment Grade		Non-investment grade		Total Notional
September 30, 2017
Credit protection sold:
Index credit default swaps	$	1,103	$	338	$	1,441
Single name credit default swaps	$	139	$	192	$	331

December 31, 2016
Credit protection sold:
Index credit default swaps	$	54	$	92	$	146
Single name credit default swaps	$	122	$	261	$	383

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, 2017 and December 31, 2016 is $65.2 million and $70.6 million, respectively, for which Jefferies has posted collateral of $51.4 million and $44.4 million, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2017 and December 31, 2016, Jefferies would have been required to post an additional $12.6 million and $26.1 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 uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. Vitesse 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.