Note 8 — Derivative Financial Instruments

We are exposed to certain interest rate and foreign currency risks. Where possible, we identify exposures in our business that can be offset internally. Where no natural offset is identified, we may choose to enter into various derivative transactions. These instruments have the effect of reducing our exposure to unfavorable changes in interest and foreign currency rates. The Company’s board of directors reviews and approves policies for managing each of these risks as summarized below. Additional information regarding our derivative financial instruments can be found in Note 10 — Fair Value Measurements and Note 14 — Accumulated Other Comprehensive Loss.

Interest Rate Risk - Investment Income

As a result of certain of its operating activities, the Company holds fiduciary funds. The Company earns interest on these funds, which is included in its condensed consolidated financial statements in revenue. These funds are regulated in terms of access, as are the instruments in which they may be invested, most of which are short-term in nature.

During 2015, in order to manage interest rate risk arising from these financial assets, the Company entered into interest rate swaps to receive a fixed rate of interest and pay a variable rate of interest. These derivatives, with total notional amounts of $300 million, were designated as hedging instruments at December 31, 2017, and had a net fair value liability of $1 million. These derivatives matured during the third quarter of 2018.

Foreign Currency Risk

Certain non-U.S. subsidiaries receive revenue and incur expenses in currencies other than their functional currency, and as a result, the foreign subsidiary’s functional currency revenue will fluctuate as the currency rates change. Additionally, the forecast Pounds sterling expenses of our London brokerage market operations may exceed their Pounds sterling revenue, and they may also hold a significant net Pounds sterling asset or liability position in the condensed consolidated balance sheet. To reduce such variability, we use foreign exchange contracts to hedge against this currency risk.

These derivatives were designated as hedging instruments and at September 30, 2018 and December 31, 2017 had total notional amounts of $537 million and $937 million, respectively, and had net fair value liabilities of $11 million and $21 million, respectively.

At September 30, 2018, the Company estimates, based on current interest and exchange rates, there will be $10 million of net derivative losses on forward exchange rates and treasury locks reclassified from accumulated other comprehensive loss into earnings within the next twelve months as the forecast transactions affect earnings. At September 30, 2018, our longest outstanding maturity was 2.2 years.

The effects of the material derivative instruments that are designated as hedging instruments on the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2018 and 2017 are as follows:

Three Months Ended September 30,

(Loss)/gain recognized in OCI (effective portion)

Location of loss reclassified from Accumulated OCL into income (effective element)

Loss reclassified from Accumulated OCL into income (effective element)

Location of gain recognized in income (ineffective portion and amount excluded from effectiveness testing)

Gain recognized in income (ineffective portion and amount excluded from effectiveness testing)

2018

2017

2018

2017

2018

2017

Forward exchange

contracts

)

Other income, net

)

(10

)

Interest expense

—

Nine Months Ended September 30,

(Loss)/gain recognized in OCI (effective portion)

Location of loss reclassified from Accumulated OCL into income (effective element)

Loss reclassified from Accumulated OCL into income (effective element)

Location of gain recognized in income (ineffective portion and amount excluded from effectiveness testing)

Gain recognized in income (ineffective portion and amount excluded from effectiveness testing)

2018

2017

2018

2017

2018

2017

Forward exchange

contracts

(14

)

Other income, net

(24

)

(53

)

Interest expense

—

We also enter into foreign currency transactions, primarily to hedge certain intercompany loans. These derivatives are not generally designated as hedging instruments, and at September 30, 2018 and December 31, 2017, we had notional amounts of $382 million and $971 million, respectively, and had a net fair value liability of $1 million and a net fair value asset of $3 million, respectively.

The effects of derivatives that have not been designated as hedging instruments on the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2018 and 2017 are as follows:

		(Loss)/gain recognized in income
		Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives not designated as hedging instruments:	Location of (loss)/gain recognized in income	2018			2017			2018			2017
Forward exchange contracts	Other income, net	$	(1	)	$	(3	)	$	(4	)	$	6