XML 24 R13.htm IDEA: XBRL DOCUMENT v3.8.0.1
Derivative Financial Instruments
9 Months Ended
Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
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,
 
 
 
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,
 
 
 
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.