Concentration Risk

9 Months Ended

Sep. 30, 2011

Risks and Uncertainties [Abstract]

Concentration Risk

(5) Concentration Risk

Revenue concentration by asset class – Approximately 46% of Federated’s total revenue for the nine months ended September 30, 2011 was attributable to money market assets. A significant change in Federated’s money market business or a significant reduction in money market assets due to regulatory changes, changes in the financial markets including significant increases in interest rates over a short period of time, significant deterioration in investor confidence, further persistent declines in or additional prolonged periods of historically low short-term interest rates and resulting fee waivers or other circumstances, could have a material adverse effect on Federated’s results of operations.

In certain money market funds, the gross yield is not sufficient to cover all of the fund’s normal operating expenses due to historically low short-term interest rates. Since the fourth quarter 2008, Federated has voluntarily waived fees in order for certain funds to maintain positive or zero net yields.

During the nine months ended September 30, 2011, fee waivers in order for certain money market funds to maintain positive or zero net yields totaled$231.7 millionand were partially offset by a related reduction in distribution expenses of$170.5 million and net income attributable to noncontrolling interests of $5.5 millionsuch that the net negative pre-tax impact to Federated was$55.7 million. The impact of these fee waivers for thenine months ended September 30, 2011 was more than the impact for the nine months ended September 30, 2010 with $181.6 million in waived fees, $138.9 million in reduced distribution expenses, $0.9 million in reduced net income attributable to noncontrolling interests and a net negative pre-tax impact of $41.8 million. During the third quarter 2011, changes in asset mix as well as further declines in interest rates for certain money market investments caused an increase in these fee waivers. As such, the net negative pre-tax impact of these fee waivers on income for the quarter endedSeptember 30, 2011 ($23.2 million) was more than the impact in the second quarter 2011 ($19.4 million), the first quarter 2011 ($13.1 million), the fourth quarter 2010 ($12.1 million) and the third quarter 2010 ($11.0 million). Management expects the fee waivers and the related reduction in distribution expense and net income attributable to noncontrolling interests will continue at least into 2013. Based on recent market conditions and assuming asset levels remain constant, fee waivers for the fourth quarter 2011 may result in a net negative pre-tax impact on income of approximately $26 million. Increases in short-term interest rates that result in higher yields on securities purchased in money market fund portfolios would reduce the net pre-tax impact of these waivers. Management estimates that an increase of 10 basis points in gross yields on securities purchased in money market fund portfolios will likely reduce the net pre-tax impact of these waivers by about forty percent from the current levels and an increase of 25 basis points would reduce the impact by about seventy percent. The actual amount of future fee waivers could vary significantly from management’s estimates as they are contingent on a number of variables including, but not limited to, available yields on instruments held by the money market funds, changes in assets within the money market funds, actions by the Federal Reserve, the U.S. Department of the Treasury and other governmental entities, changes in expenses of the money market funds, changes in the mix of money market customer assets, Federated’s willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by third parties.

Revenue concentration by product – Approximately 12% and 11% of Federated’s total revenue were derived from services provided to two sponsored funds, the Federated Kaufmann Fund and the Federated Prime Obligations Fund, respectively, for both the three and nine months ended September 30, 2011. A significant and prolonged decline in the assets under management in these funds could have a material adverse effect on Federated’s future revenues and net income.

Revenue concentration by customer – Approximately 9% and 10% of Federated’s total revenue for the three and nine months ended September 30, 2011, respectively, were derived from services provided to one intermediary customer, the Bank of New York Mellon Corporation (including its Pershing subsidiary). Significant changes in Federated’s relationship with this customer could have a material adverse effect on Federated’s future revenues and, to a lesser extent, net income, due to related material reductions to distribution expenses associated with this intermediary.

A listing of Federated’s risk factors is included herein under the section entitled Risk Factors under Item 2 of Part I, Management’s Discussion and Analysis of Financial Condition and Results of Operations.