Derivative Instruments

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

See Note 14, Consolidated Company-Sponsored Investment Funds, for disclosure of derivative instruments held by our consolidated company-sponsored investment funds.

We enter various futures, forwards, options and swaps to economically hedge certain seed capital investments. Also, we have currency forwards that help us to economically hedge certain balance sheet exposures. In addition, our options desk trades long and short exchange-traded equity options. We do not hold any derivatives designated in a formal hedge relationship under ASC 815-10, Derivatives and Hedging.

The notional value and fair value as of September 30, 2023 and December 31, 2022 for derivative instruments (excluding derivative instruments relating to our options desk trading activities discussed below) not designated as hedging instruments were as follows:


			Fair Value
	Notional Value		Derivative Assets		Derivative Liabilities
	(in thousands)
September 30, 2023:
Exchange-traded futures	$	155,467	$	2,946	$	9
Currency forwards	27,740		5,314		4,494
Interest rate swaps	19,350		671		483
Credit default swaps	170,418		13,130		5,234
Total return swaps	70,403		2,367		3
Option swaps	50,000		—		499
Total derivatives	$	493,378	$	24,428	$	10,722

December 31, 2022:
Exchange-traded futures	$	154,687	$	1,768	$	162
Currency forwards	34,597		4,446		5,047
Interest rate swaps	16,847		386		262
Credit default swaps	225,671		17,507		7,302
Total return swaps	28,742		605		933
Option swaps	50,000		—		6
Total derivatives	$	510,544	$	24,712	$	13,712

As of September 30, 2023 and December 31, 2022, the derivative assets and liabilities are included in both receivables and payables to brokers and dealers on our condensed consolidated statements of financial condition.

The gains and losses for derivative instruments (excluding our options desk trading activities discussed below) for the three and nine months ended September 30, 2023 and 2022 recognized in investment gains (losses) in the condensed consolidated statements of income were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)
Exchange-traded futures	$	4,622	$	9,388	$	2,022	$	23,342
Currency forwards	594		1,318		557		3,600
Interest rate swaps	93		45		144		(7)
Credit default swaps	(272)		(1,079)		(4,513)		5,358
Total return swaps	2,858		2,970		(843)		18,401
Option swaps	1,041		1,897		214		5,676
Net gains (losses) on derivative instruments	$	8,936	$	14,539	$	(2,419)	$	56,370

We may be exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments. We minimize our counterparty exposure through a credit review and approval process. In addition, we have executed various collateral arrangements with counterparties to the over-the-counter derivative transactions that require both pledging and accepting collateral in the form of cash. As of September 30, 2023 and December 31, 2022, we held $13.5 million and $8.4 million, respectively, of cash collateral payable to trade counterparties. This obligation to return cash is reported in payables to brokers and dealers in our condensed consolidated statements of financial condition.

Although notional amount typically is utilized as the measure of volume in the derivatives market, it is not used as a measure of credit risk. Generally, the current credit exposure of our derivative contracts is limited to the net positive estimated fair value of derivative contracts at the reporting date after taking into consideration the existence of netting agreements and any collateral received. A derivative with positive value (a derivative asset) indicates existence of credit risk because the counterparty would owe us if the contract were closed. Alternatively, a derivative contract with negative value (a derivative liability) indicates we would owe money to the counterparty if the contract were closed. Generally, if there is more than one derivative transaction with a single counterparty, a master netting arrangement exists with respect to derivative transactions with that counterparty to provide for aggregate net settlement.

Certain of our standardized contracts for over-the-counter derivative transactions (“ISDA Master Agreements”) contain credit risk related contingent provisions pertaining to each counterparty’s credit rating. In some ISDA Master Agreements, if the counterparty’s credit rating, or in some agreements, our assets under management (“AUM”), falls below a specified threshold, either a default or a termination event permitting us or the counterparty to terminate the ISDA Master Agreement would be triggered. In all agreements that provide for collateralization, various levels of collateralization of net liability positions are applicable, depending on the credit rating of the counterparty. As of September 30, 2023 and December 31, 2022, we delivered $1.6 million and $4.2 million, respectively, of cash collateral into brokerage accounts. We report this cash collateral in cash and cash equivalents in our condensed consolidated statement of financial condition.

As of September 30, 2023 and December 31, 2022, long and short exchange-traded equity options were classified as held for sale on our condensed consolidated statement of financial condition. Our options desk provides our clients with equity derivative strategies and execution for exchange-traded options on single stocks, exchange-traded funds and indices. While predominately agency-based, the options desk may commit capital to facilitate a client’s transaction. Our options desk hedges the risks associated with this activity by taking offsetting positions in equities. For the three and nine months ended September 30, 2023, we recognized gains of $0.4 million and losses of $3.3 million, respectively, on equity options activity. For the three and nine months ended September 30, 2022, we recognized losses of $3.6 million and $13.4 million, respectively, on equity options activity. These gains and losses are recognized in investment gains (losses) in the condensed consolidated statement of income.