Derivative Financial Instruments

9 Months Ended

Aug. 31, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

Note 6. Derivative Financial Instruments

Off-Balance Sheet Risk

We have 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

Our derivative activities are recorded at fair value in the Consolidated Statements of Financial Condition in Financial Instruments Owned — Derivatives and Financial Instruments Sold, Not Yet Purchased — 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 Principal transactions in the Consolidated Statements of Earnings 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, we may enter into derivative transactions to satisfy the needs of our clients and to manage our own exposure to market and credit risks resulting from our trading activities. (See Notes 5 and 19 for additional disclosures about derivative instruments.)

Derivatives are subject to various risks similar to other financial instruments, including market, credit and operational risk. In addition, we may be exposed to legal risks related to derivative activities. 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. We manage the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of our firmwide risk management policies. In connection with our derivative activities, we may enter into master netting agreements and collateral arrangements with counterparties. These agreements provide us 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.

A portion of our derivative activities is performed by Jefferies Financial Products, LLC (“JFP”), a market maker in commodity index products and a trader in commodity futures and options. JFP maintains credit intermediation facilities with a highly rated European bank (the “Bank”), which allow JFP customers that require a counterparty with a high credit rating for commodity index transactions to transact with the Bank. The Bank simultaneously enters into offsetting transactions with JFP and receives a fee from JFP for providing credit support.

The following table presents the fair value and related number of derivative contracts at August 31, 2011 and November 30, 2010 categorized by predominant risk exposure. 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 (dollars in thousands):

	August 31, 2011
	Assets					Liabilities
				Number of					Number of
	Fair Value			Contracts		Fair Value			Contracts
Interest rate contracts	$	417,666			93,251	$	512,254			134,486
Foreign exchange contracts		501,063			105,139		546,885			109,033
Equity contracts		951,232			2,329,567		665,190			2,090,700
Commodity contracts		595,268			172,621		749,278			181,285
Credit contracts		60,331			85		41,834			58
Total		2,525,560			2,700,663		2,515,441			2,515,562
Counterparty/cash-collateral netting		(1,609,418	)				(1,919,499	)
Total per Consolidated Statement of Financial Condition	$	916,142				$	595,942

	November 30, 2010
	Assets					Liabilities
				Number of					Number of
	Fair Value			Contracts		Fair Value			Contracts
Interest rate contracts	$	77,295			41,166	$	126,281			43,243
Foreign exchange contracts		20,263			1,165		17,004			290
Equity contracts		275,760			1,166,365		249,229			1,133,464
Commodity contracts		62,727			103,562		76,911			35,071
Credit contracts		19,835			18		15,647			15
Total		455,880			1,312,276		485,072			1,212,083
Counterparty/cash-collateral netting		(336,612	)				(425,520	)
Total per Consolidated Statement of Financial Condition	$	119,268				$	59,552

The following table presents unrealized and realized gains and losses on derivative contracts for the three months ended August 31, 2011 and 2010, respectively, and the nine and eight months ended August 31, 2011 and 2010, respectively (in thousands):

							Nine Months			Eight Months
	Three Months Ended						Ended			Ended
	August 31, 2011			August 31, 2010			August 31, 2011			August 31, 2010
	Gain (Loss)			Gain (Loss)			Gain (Loss)			Gain (Loss)
Interest rate contracts	$	(103,572	)	$	(90,599	)	$	(190,800	)	$	(127,358	)
Foreign exchange contracts		2,200			(1,185	)		(5,981	)		(369	)
Equity contracts		(74,564	)		(14,345	)		(178,433	)		(61,613	)
Commodity contracts		8,512			2,231			41,102			5,963
Credit contracts		11,383			449			17,123			(50,313	)
Total	$	(156,041	)	$	(103,449	)	$	(316,989	)	$	(233,690	)

The following tables set forth the remaining contract maturity of the fair value of OTC derivative assets and liabilities as of August 31, 2011 (in thousands):

	OTC derivative assets (1) (2) (4)
					Greater Than		Cross-Maturity
	0 - 12 Months		1 - 5 Years		5 Years		Netting (3)			Total
Commodity swaps, options and forwards	$	102,889	$	11,396	$	—	$	(782	)	$	113,503
Equity options		17,992		—		—		—			17,992
Credit default swaps		468		33,476		11,381		(263	)		45,062
Total return swaps		518		17		—		—			535
Foreign currency forwards, swaps and options		191,540		36,420		3		(9,973	)		217,990
Fixed income forwards		92		—		—		—			92
Interest rate swaps and caps		46,301		88,646		142,426		(14,560	)		262,813
Total	$	359,800	$	169,955	$	153,810	$	(25,578	)		657,987
Cross product counterparty netting											(17,588	)
Total OTC derivative assets included in Financial instruments owned										$	640,399

(1)	At August 31, 2011, we held exchange traded derivative assets and other credit enhancements of $308.0 million.
(2)	OTC derivative assets in the table above are gross of collateral received. OTC derivative assets are recorded net of collateral received on the Consolidated Statements of Financial Condition. At August 31, 2011, cash collateral received was $32.2 million.
(3)	Amounts represent the netting of receivable balances with payable balances within product category for the same counterparty across maturity categories.
(4)	Derivative fair values include counterparty netting within product category.

	OTC derivative liabilities (1)(2)(4)
					Greater Than		Cross-Maturity
	0 - 12 Months		1 - 5 Years		5 Years		Netting (3)			Total
Commodity swaps, options and forwards	$	258,951	$	15,251	$	—	$	(782	)	$	273,420
Equity options		11,079		1,895		—		—			12,974
Credit default swaps		1,001		23,309		—		(263	)		24,047
Total return swaps		—		1,443		—		—			1,443
Foreign currency forwards, swaps and options		238,109		37,407		—		(9,973	)		265,543
Interest rate swaps and caps		47,157		164,399		167,734		(14,560	)		364,730
Total	$	556,297	$	243,704	$	167,734	$	(25,578	)		942,157
Cross product counterparty netting											(17,588	)
Total OTC derivative liabilities included in Financial instruments sold, not yet purchased										$	924,569

(1)	At August 31, 2011, we held exchange traded derivative liabilities and other credit enhancements of $13.7 million.
(2)	OTC derivative liabilities in the table above are gross of collateral pledged. OTC derivative liabilities are recorded net of collateral pledged on the Consolidated Statements of Financial Condition. At August 31, 2011, cash collateral pledged was $342.3 million.
(3)	Amounts represent the netting of receivable balances with payable balances within product category for the same counterparty across maturity categories.
(4)	Derivative fair values include counterparty netting within product category.

At August 31, 2011, the counterparty credit quality with respect to the fair value of our OTC derivatives assets was as follows (in thousands):

Counterparty credit quality (1):
A or higher	$	439,724
B to BBB		185,906
Lower than B		6,982
Unrated		7,787
Total	$	640,399

(1) We utilize the credit ratings of external rating agencies when available. When external credit ratings are not available, we may utilize internal credit ratings determined by our credit risk management. Credit ratings determined by credit risk management use methodologies that produce ratings generally consistent with those produced by external rating agencies.

Contingent Features

Certain of our derivative instruments contain provisions that require our debt to maintain an investment grade credit rating from each of the major credit rating agencies. If our 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 our 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 August 31, 2011 and November 30, 2010, is $239.0 million and $51.8 million, respectively, for which we have posted collateral of $221.5 million and $44.9 million, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on August 31, 2011 and November 30, 2010, we would have been required to post an additional $17.5 million and $6.5 million, respectively, of collateral to our counterparties.