DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2013

DERIVATIVE FINANCIAL INSTRUMENTS

6.    DERIVATIVE FINANCIAL INSTRUMENTS

Blackstone and the Blackstone Funds enter into derivative contracts in the normal course of business to achieve certain risk management objectives and for general investment purposes. Additionally, Blackstone may enter into derivative contracts in order to hedge its interest rate risk exposure against the effects of interest rate changes. As a result of the use of derivative contracts, Blackstone and the consolidated Blackstone Funds are exposed to the risk that counterparties will fail to fulfill their contractual obligations. To mitigate such counterparty risk, Blackstone and the consolidated Blackstone Funds enter into contracts with certain major financial institutions, all of which have investment grade ratings. Counterparty credit risk is evaluated in determining the fair value of derivative instruments.

Fair Value Hedges

In June 2012, Blackstone removed the fair value designation of its interest rate swaps that were previously used to hedge a portion of the interest rate risk on the Partnership’s fixed rate borrowings. The impact to the Consolidated Statements of Operations for the period up through the date of de-designation is reflected within “Fair Value Hedges” in the table below. Changes in the fair value of the interest rate swaps subsequent to the date of de-designation are reflected within Freestanding Derivatives within Interest Rate Contracts in the table below.

Freestanding Derivatives

Freestanding derivatives are instruments that Blackstone and certain of the consolidated Blackstone Funds have entered into as part of their overall risk management and investment strategies. These derivative contracts are not designated as hedging instruments for accounting purposes. Such contracts may include interest rate swaps, foreign exchange contracts, equity swaps, options, futures and other derivative contracts.

The table below summarizes the aggregate notional amount and fair value of the derivative financial instruments. The notional amount represents the absolute value amount of all outstanding derivative contracts.

	December 31, 2013								December 31, 2012
	Assets				Liabilities				Assets				Liabilities
	Notional		Fair Value		Notional		Fair Value		Notional		Fair Value		Notional		Fair Value
Freestanding Derivatives
Blackstone—Other
Interest Rate Contracts	$	1,994,276	$	8,521	$	1,083,140	$	2,676	$	689,300	$	55,270	$	636,555	$	4,116
Foreign Currency Contracts		166,066		1,480		163,787		1,015		16,771		74		7,025		81
Total Return Swaps		326,929		342		—		—		—		—		—		—
Credit Default Swaps		—		—		10,000		591		—		—		—		—
Investments of Consolidated Blackstone Funds
Foreign Currency Contracts		396,569		30,830		239,037		10,018		435,229		37,898		301,551		17,101
Interest Rate Contracts		62,193		3,726		—		—		165,517		6,132		90,500		772
Total	$	2,946,033	$	44,899	$	1,495,964	$	14,300	$	1,306,817	$	99,374	$	1,035,631	$	22,070

The table below summarizes the impact to the Consolidated Statements of Operations from derivative financial instruments:

	Year Ended December 31,
	2013			2012			2011
Fair Value Hedges—Interest Rate Swaps
Hedge Ineffectiveness	$	—		$	548		$	4,649
Excluded from Assessment of Effectiveness	$	—		$	(938	)	$	(3,465	)
Realized Gain	$	—		$	22,941		$	—
Freestanding Derivatives
Realized Gains (Losses)
Interest Rate Contracts	$	34,206		$	(2,752	)	$	(8,634	)
Foreign Currency Contracts		4,022			(3,816	)		1,739
Credit Default Swaps		752			(1	)		(111	)
Other		—			—			(153	)
Total	$	38,980		$	(6,569	)	$	(7,159	)
Net Change in Unrealized Gains (Losses)
Interest Rate Contracts	$	(1,947	)	$	12,134		$	8,718
Foreign Currency Contracts		2,636			(5,523	)		(33,408	)
Other		392			—			(7	)
Total	$	1,081		$	6,611		$	(24,697	)

Since the inception of the above mentioned hedge designation, Blackstone recognized a $64.2 million increase in the fair value of the hedged borrowing. This basis adjustment is being accreted using the effective interest method through August 15, 2019, the remaining term of the hedged borrowing.

As of December 31, 2013, 2012 and 2011, the Partnership had not designated any derivatives as cash flow hedges or hedges of net investments in foreign operations.