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 and Financial instruments sold, not yet purchased, 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. Net realized and unrealized gains and losses are recognized in Principal transaction revenues 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 Note 4, Fair Value Disclosures, and Note 17, Commitments, Contingencies and Guarantees 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. We manage the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of our firm wide risk management policies.

In connection with our derivative activities, we may enter into International Swaps and Derivative Association, Inc. (“ISDA”) master netting agreements or similar agreements with counterparties. A master agreement creates a single contract under which all transactions between two counterparties are executed allowing for trade aggregation and a single net payment obligation. Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due from the counterparty or a third party. In addition, we enter into customized bilateral trading agreements and other customer agreements that provide for the netting of receivables and payables with a given counterparty as a single net obligation.

Under our ISDA master netting agreements, we typically also execute credit support annexes, which provide for collateral, either in the form of cash or securities, to be posted by or paid to a counterparty based on the fair value of the derivative receivable or payable based on the rates and parameters established in the credit support annex. In the event of the counterparty’s default, provisions of the master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. In addition, any collateral posted can be applied to the net obligations, with any excess returned; and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims in bankruptcy court.

The conditions supporting the legal right of offset may vary from one legal jurisdiction to another and the enforceability of master netting agreements and bankruptcy laws in certain countries or in certain industries is not free from doubt. The right of offset is dependent both on contract law under the governing arrangement and consistency with the bankruptcy laws of the jurisdiction where the counterparty is located. Industry legal opinions with respect to the enforceability of certain standard provisions in respective jurisdictions are relied upon as a part of managing credit risk. In cases where we have not determined an agreement to be enforceable, the related amounts are not offset. Master netting agreements are a critical component of our risk management processes as part of reducing counterparty credit risk and managing liquidity risk.

We are also a party to clearing agreements with various central clearing parties. Under these arrangements, the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount. In the event of default, a net termination amount is determined based on the market values of all outstanding positions and the clearing organization or clearing member provides for the liquidation and settlement of the net termination amount among all counterparties to the open derivative contracts.

The following tables present the fair value and related number of derivative contracts at August 31, 2016 and November 30, 2015 categorized by type of derivative contract and the platform on which these derivatives are transacted. 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 the Consolidated Statements of Financial Condition as appropriate under U.S. 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).



	August 31, 2016 (1)
	Assets				Liabilities
	Fair Value			Number of Contracts	Fair Value			Number of Contracts
Interest rate contracts:
Exchange-traded	$	2,286		26,232	$	372		33,205
Cleared OTC	4,282,590			3,450	4,218,171			3,307
Bilateral OTC	588,640			2,046	558,296			1,234
Foreign exchange contracts:
Exchange-traded	—			358	—			470
Bilateral OTC	428,868			9,639	447,085			9,567
Equity contracts:
Exchange-traded	799,932			3,463,584	960,272			2,999,406
Bilateral OTC	93,547			1,086	117,374			1,265
Commodity contracts:
Exchange-traded	—			1,624	—			888
Credit contracts:
Cleared OTC	1,747			10	8,539			18
Bilateral OTC	20,846			152	32,043			189
Total gross derivative assets/ liabilities:
Exchange-traded	802,218				960,644
Cleared OTC	4,284,337				4,226,710
Bilateral OTC	1,131,901				1,154,798
Amounts offset in the Consolidated Statements of Financial Condition (2):
Exchange-traded	(779,958		)		(779,958		)
Cleared OTC	(4,233,022		)		(4,212,004		)
Bilateral OTC	(874,894		)		(978,067		)
Net amounts per Consolidated Statements of Financial Condition (3)	$	330,582			$	372,123


(1)	Exchange traded derivatives include derivatives executed on an organized exchange. Cleared OTC derivatives include derivatives executed bilaterally and subsequently novated to and cleared through central clearing counterparties. Bilateral OTC derivatives include derivatives executed and settled bilaterally without the use of an organized exchange or central clearing counterparty.


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


(3)	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.



	November 30, 2015 (1)
	Assets				Liabilities
	Fair Value			Number of Contracts	Fair Value			Number of Contracts
Interest rate contracts:
Exchange-traded	$	998		52,605	$	364		70,672
Cleared OTC	2,213,730			2,742	2,202,836			2,869
Bilateral OTC	695,365			1,401	646,758			1,363
Foreign exchange contracts:
Exchange-traded	—			441	—			112
Bilateral OTC (4)	453,202			7,646	466,021			7,264
Equity contracts:
Exchange-traded	955,287			3,054,315	1,004,699			2,943,657
Bilateral OTC	61,004			1,039	81,085			1,070
Commodity contracts:
Exchange-traded	—			1,726	—			1,684
Bilateral OTC (4)	19,342			29	4,628			28
Credit contracts:
Cleared OTC	621			39	841			44
Bilateral OTC	16,977			100	59,314			135
Total gross derivative assets/liabilities:
Exchange-traded	956,285				1,005,063
Cleared OTC	2,214,351				2,203,677
Bilateral OTC	1,245,890				1,257,806
Amounts offset in the Consolidated Statements of Financial Condition (2):
Exchange-traded	(938,482		)		(938,482		)
Cleared OTC	(2,184,438		)		(2,184,438		)
Bilateral OTC	(1,042,526		)		(1,135,078		)
Net amounts per Consolidated Statements of Financial Condition (3)	$	251,080			$	208,548


(1)	Exchange traded derivatives include derivatives executed on an organized exchange. Cleared OTC derivatives include derivatives executed bilaterally and subsequently novated to and cleared through central clearing counterparties. Bilateral OTC derivatives include derivatives executed and settled bilaterally without the use of an organized exchange or central clearing counterparty.


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


(3)	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.

(4)

Bilateral OTC 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 bilateral OTC foreign exchange contracts from those amounts previously reported to correct for the classification of certain contracts. The total amount of bilateral OTC contracts remained unchanged.

The following table presents unrealized and realized gains (losses) on derivative contracts:



	Three Months Ended						Nine Months Ended
Gains (Losses)	August 31, 2016			August 31, 2015			August 31, 2016			August 31, 2015
Interest rate contracts	$	(16,631	)	$	25,308		$	(96,715	)	$	580
Foreign exchange contracts	7,886			6,893			14,000			30,417
Equity contracts	(185,264		)	68,649			(509,476		)	28,008
Commodity contracts	4,089			(4,757		)	1,899			15,480
Credit contracts	4,024			(4,375		)	1,441			(612		)
Total	$	(185,896	)	$	91,718		$	(588,851	)	$	73,873

OTC Derivatives. The following tables set forth by remaining contract maturity the fair value of OTC derivative assets and liabilities at August 31, 2016 (in thousands):



	OTC Derivative Assets (1) (2) (3)
	0 – 12 Months		1 – 5 Years		Greater Than 5 Years		Cross-Maturity Netting (4)			Total
Equity swaps and options	$	27,781	$	5,370	$	—	$	—		$	33,151
Credit default swaps	—		7,948		230		(177		)	8,001
Total return swaps	27,796		874		—		(613		)	28,057
Foreign currency forwards, swaps and options	84,564		29,937		—		(7,150		)	107,351
Interest rate swaps, options and forwards	42,055		229,950		88,205		(97,075		)	263,135
Total	$	182,196	$	274,079	$	88,435	$	(105,015	)	439,695
Cross product counterparty netting										(754		)
Total OTC derivative assets included in Financial instruments owned										$	438,941


(1)	At August 31, 2016, we held exchange traded derivative assets and other credit agreements with a fair value of $25.6 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 on the Consolidated Statements of Financial Condition. At August 31, 2016, cash collateral received was $134.0 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.



	OTC Derivative Liabilities (1) (2) (3)
	0 – 12 Months		1 – 5 Years		Greater Than 5 Years		Cross-Maturity Netting (4)			Total
Equity swaps and options	$	13,408	$	23,617	$	—	$	—		$	37,025
Credit default swaps	28		12,639		1,672		(177		)	14,162
Total return swaps	26,824		16,967		—		(613		)	43,178
Foreign currency forwards, swaps and options	112,699		20,024		—		(7,150		)	125,573
Fixed income forwards	5,044		—		—		—			5,044
Interest rate swaps, options and forwards	23,709		119,675		124,541		(97,075		)	170,850
Total	$	181,712	$	192,922	$	126,213	$	(105,015	)	395,832
Cross product counterparty netting										(754		)
Total OTC derivative liabilities included in Financial instruments sold, not yet purchased										$	395,078


(1)	At August 31, 2016, we held exchange traded derivative liabilities and other credit agreements with a fair value of $193.2 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 on the Consolidated Statements of Financial Condition. At August 31, 2016, cash collateral pledged was $216.1 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 August 31, 2016, 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	$	214,650
BBB- to BBB+	77,419
BB+ or lower	64,975
Unrated	81,897
Total	$	438,941


(1)	We utilize internal credit ratings determined by our 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 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, 2016 and November 30, 2015 is $85.9 million and $114.5 million, respectively, for which we have posted collateral of $65.4 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 August 31, 2016 and November 30, 2015, we would have been required to post an additional $22.6 million and $19.7 million, respectively, of collateral to our counterparties.