13. Derivative Instruments in the CLOs

In the ordinary course of business, the CLOs enter into various types of derivative instruments. Derivative instruments serve as components of the CLOs’ investment strategies and are utilized primarily to structure and manage the risks related to currency, credit and interest exposure. The derivative instruments that the CLOs hold or issue do not qualify for hedge accounting under the accounting standards for derivatives and hedging. The CLOs’ derivative instruments include cross-currency swap contracts, currency options, credit risk swap contracts, and interest rate cap contracts, and are carried at fair value in the Partnership’s consolidated balance sheets.

Certain CLOs purchase put and call options to manage risk from changes in the value of foreign currencies. Certain CLOs entered into cross-currency swap transactions, which represent agreements that obligate two parties to exchange a series of cash flows in different currencies at specified intervals based upon or calculated by reference to changes in specified prices or rates for a specified amount of an underlying asset or otherwise determined notional amount. The cross-currency swap transactions are stated at fair value and the difference between cash to be paid and received on swaps is recognized as net investment gains (losses) of Consolidated Funds in the consolidated statements of operations. The fair value of derivative instruments held by the CLOs are recorded in investments of Consolidated Funds in the consolidated balance sheets.

The following table identifies the gross fair value amounts of derivative instruments, which may be offset and presented net in the consolidated balance sheets to the extent that there is a legal right of offset, categorized by the volume of the total notional amounts or number of contracts and by primary underlying risk as of December 31, 2012 and 2011 (Dollars in millions):

December 31, 2012

Notional
Amount

Fair Value -
Assets

Fair Value -
Liabilities

Currency-related

Cross-currency swap contract(s)

274.5

5.7

(21.5

)

Currency option(s)

184.8

7.3

—

Interest-related

Interest rate cap contract(s)

36.0

—

13.0

(21.5

)


	December 31, 2011
	Notional Amount		Fair Value - Assets		Fair Value - Liabilities
Currency-related
Cross-currency swap contract(s)	$	272.7	$	16.6	$	(5.9	)
Currency option(s)		181.3		10.0		—
Interest-related
Interest rate cap contract(s)		32.0		0.1		—

			$	26.7	$	(5.9	)

The following tables present a summary of net realized and unrealized appreciation (depreciation) on derivative instruments which is included in net investment gains (losses) of Consolidated Funds in the consolidated statements of operations (Dollars in millions):

Year Ended December 31, 2012

Realized
Appreciation
(Depreciation)

Change in
Unrealized
Depreciation

Total

Currency-related

Cross-currency swap contract(s)

1.9

(21.4

)

(19.5

)

Currency option(s)

(0.1

)

(2.9

)

(3.0

)

Interest-related

Interest rate swap contract(s)

—

(0.1

)

(0.1

)

1.8

(24.4

)

(22.6

)


	Year Ended December 31, 2011
	Realized Apreciation (Depreciation)			Change in Unrealized Deppreciation			Total
Currency-related
Cross-currency swap contract(s)	$	17.5		$	(9.4	)	$	8.1
Currency option(s)		(0.1	)		(1.2	)		(1.3	)
Credit-related
Credit risk swap contract(s)		—			(0.1	)		(0.1	)
Interest-related
Interest rate cap contract(s)		—			(0.1	)		(0.1	)

	$	17.4		$	(10.8	)	$	6.6


	Year Ended December 31, 2010
	Realized Apreciation (Depreciation)			Change in Unrealized Appreciation (Deppreciation)			Total
Currency-related
Cross-currency swap contract(s)	$	22.3		$	(75.5	)	$	(53.2	)
Currency option(s)		(0.1	)		4.4			4.3
Credit-related
Credit risk swap contract(s)		—			(1.2	)		(1.2	)
Interest-related
Interest rate cap contract(s)		—			0.1			0.1

	$	22.2		$	(72.2	)	$	(50.0	)

Certain derivative instruments contain provisions which require the CLOs or the counterparty to post collateral if certain conditions are met. Cash received to satisfy these collateral requirements is included in restricted cash and securities of Consolidated Funds (see Note 2) and in other liabilities of Consolidated Funds in the consolidated balance sheets. The Partnership has elected not to offset derivative positions against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements.