12. Derivatives and Hedging

Legg Mason uses currency forwards to economically hedge the risk of movements in exchange rates, primarily between the U.S. dollar, British pound, Australian dollar, Singapore dollar, Japanese yen, and euro. All derivative transactions for which Legg Mason has certain legally enforceable rights of setoff are governed by International Swaps and Derivative Association ("ISDA") Master Agreements. For these derivative transactions, Legg Mason has one ISDA Master Agreement with each of the significant counterparties, which covers transactions with that counterparty. Each of the respective ISDA agreements provides for settlement netting and close-out netting between Legg Mason and that counterparty, which are legally enforceable rights to setoff. Other assets recorded in the Consolidated Balance Sheets as of September 30, 2017 and March 31, 2017, were $5,109 and $2,718, respectively. Other liabilities recorded in the Consolidated Balance Sheets as of September 30, 2017 and March 31, 2017, were $3,167 and $4,522, respectively.

Legg Mason also uses market hedges on certain seed capital investments by entering into futures contracts to sell index funds that benchmark the hedged seed capital investments.

On July 26, 2017, Legg Mason entered into four total return swap arrangements with financial intermediaries with respect to a Legg Mason sponsored ETF, which resulted in an investment by each of the financial intermediaries in the ETF. Under the terms of each of the total return swap arrangements, Legg Mason receives the related investment gains and losses on the underlying shares of the ETF and pays a floating rate on the value of the underlying shares equal to the three-month LIBOR plus 1.6%. Each of the total return swap arrangements allow either party to terminate all or part of the arrangement, provide for automatic termination upon occurrence of certain events, and expire in July 2018. Each financial intermediary counterparty may hedge its total return swap position through an investment in the ETF and collectively, the four financial intermediaries purchased interests in the Legg Mason ETF for a total amount of $23,096. As of September 30, 2017, the aggregate notional amount related to these total return swap arrangements was $23,588. In connection with the arrangements, Legg Mason executed futures contracts with a notional amount of $40,090 to partially hedge the gains and losses recognized on the total return swaps.

Similarly, on June 6, 2017, Legg Mason entered into four total return swap arrangements with financial intermediaries with respect to another Legg Mason sponsored ETF, which resulted in an investment by each of the financial intermediaries in the ETF. Under the terms of each of the total return swap arrangements, Legg Mason receives the related investment gains and losses on the underlying shares of the ETF and pays a floating rate on the value of the underlying shares equal to the three-month LIBOR plus 1.35%. Each of the total return swap arrangements allow either party to terminate all or part of the arrangement, provide for automatic termination upon occurrence of certain events, and expire in June 2018. Each financial intermediary counterparty may hedge its total return swap position through an investment in the ETF and collectively, the four financial intermediaries have purchased interests in the Legg Mason ETF for a total amount of $20,253. As of September 30, 2017, the aggregate notional amount related to these total return swaps was $20,876. In connection with the arrangements, Legg Mason executed futures contracts with a notional amount of $20,511 to partially hedge the gains and losses recognized on the total return swaps.

As further discussed in Note 7, in April 2016, Legg Mason executed a 4.67-year, amortizing interest rate swap, which was terminated in August 2016. Also, in April 2016, Legg Mason terminated another previously existing interest rate swap.

With the exception of the two interest rate swap contracts discussed in Note 7, Legg Mason has not designated any derivatives as hedging instruments for accounting purposes during the periods ended September 30, 2017, March 31, 2017, or September 30, 2016. In addition to the total return swap arrangements and the related futures contracts discussed above, as of September 30, 2017, Legg Mason had open currency forward contracts with aggregate notional amounts totaling $221,009, and open futures contracts relating to seed capital investments with aggregate notional values totaling $147,988. With the exception of the total return swap arrangements and related futures contracts, these amounts are representative of the level of non-hedge designation derivative activity throughout the six months ended September 30, 2017 and 2016. As of September 30, 2017, the weighted-average remaining contract terms for currency forward contracts and futures contracts relating to seed capital investments were six and three months, respectively.

The following table presents the derivative assets and related offsets, if any, as of September 30, 2017:



								Gross amounts not offset in the Balance Sheet
	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet			Net amount of derivative assets presented in the Balance Sheet		Financial instruments		Cash collateral		Net amount as of September 30, 2017

Derivative instruments not designated as hedging instruments
Currency forward contracts	$	7,174	$	(3,153	)	$	4,021	$	—	$	—	$	4,021
Futures contracts relating to:
Seed capital investments	—		—			—		248		399		647
Total return swaps	—		—			—		840		4,132		4,972
Total derivative instruments not designated as hedging instruments	$	7,174	$	(3,153	)	$	4,021	$	1,088	$	4,531	$	9,640

The following table presents the derivative liabilities and related offsets, if any, as of September 30, 2017:



									Gross amounts not offset in the Balance Sheet
	Gross amounts of recognized liabilities			Gross amounts offset in the Balance Sheet		Net amount of derivative liabilities presented in the Balance Sheet			Financial instruments			Cash collateral		Net amount as of September 30, 2017

Derivative instruments not designated as hedging instruments
Currency forward contracts	$	(376	)	$	189	$	(187	)	$	—		$	—	$	(187	)
Futures contracts relating to:
Seed capital investments	—			—		—			(2,087		)	6,856		4,769
Total return swaps	—			—		—			(893		)	3,184		2,291
Total futures contracts	—			—		—			(2,980		)	10,040		7,060
Total derivative instruments not designated as hedging instruments	$	(376	)	$	189	$	(187	)	$	(2,980	)	$	10,040	$	6,873

The following table presents the derivative assets and related offsets, if any, as of March 31, 2017:



								Gross amounts not offset in the Balance Sheet
	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet			Net amount of derivative assets presented in the Balance Sheet		Financial instruments		Cash collateral		Net amount as of March 31, 2017

Derivative instruments not designated as hedging instruments
Currency forward contracts	$	3,470	$	(928	)	$	2,542	$	—	$	—	$	2,542
Futures contracts relating to seed capital investments	—		—			—		176		2,878		3,054
Total derivative instruments not designated as hedging instruments	$	3,470	$	(928	)	$	2,542	$	176	$	2,878	$	5,596

The following table presents the derivative liabilities and related offsets, if any, as of March 31, 2017:



									Gross amounts not offset in the Balance Sheet
	Gross amounts of recognized liabilities			Gross amounts offset in the Balance Sheet		Net amount of derivative liabilities presented in the Balance Sheet			Financial instruments			Cash collateral		Net amount as of March 31, 2017

Derivative instruments not designated as hedging instruments
Currency forward contracts	$	(3,641	)	$	751	$	(2,890	)	$	—		$	—	$	(2,890	)
Futures contracts relating to seed capital investments	—			—		—			(1,632		)	4,155		2,523
Total derivative instruments not designated as hedging instruments	$	(3,641	)	$	751	$	(2,890	)	$	(1,632	)	$	4,155	$	(367	)

The following table presents gains (losses) recognized in the Consolidated Statements of Income on derivative instruments. As described above, the currency forward contracts and futures and forward contracts for seed capital investments included below are economic hedges of interest rate and market risk of certain operating and investing activities of Legg Mason, including foreign exchange risk on acquisition contingent consideration. Gains and losses on these derivative instruments substantially offset gains and losses of the economically hedged items.



		Three Months Ended September 30,
		2017					2016
	Income Statement Classification	Gains		Losses			Gains		Losses

Derivatives not designated as hedging instruments
Currency forward contracts relating to:
Operating activities	Other expense	$	4,989	$	(1,926	)	$	1,824	$	(1,477	)
Seed capital investments	Other non-operating income (expense)	69		(1,153		)	366		(748		)
Futures contracts relating to:
Seed capital investments	Other non-operating income (expense)	285		(6,813		)	—		(5,319		)
Total return swaps	Other non-operating income (expense)	89		(2,063		)	—		—
Total return swaps	Other non-operating income (expense)	885		—			—		—

Total gain (loss) from derivatives not designated as hedging instruments		6,317		(11,955		)	2,190		(7,544		)
Derivative designated as a cash flow hedge (See Note 7)
Interest rate swap (termination)	Other non-operating income (expense)	—		—			—		(3,662		)
Interest rate swap	Interest expense	—		—			—		(237		)
Total		$	6,317	$	(11,955	)	$	2,190	$	(11,443	)



		Six Months Ended September 30,
		2017					2016
	Income Statement Classification	Gains		Losses			Gains		Losses

Derivatives not designated as hedging instruments
Currency forward contracts relating to:
Operating activities	Other expense	$	9,440	$	(4,237	)	$	12,177	$	(9,283	)
Seed capital investments	Other non-operating income (expense)	226		(1,948		)	1,256		(1,160		)
Futures contracts relating to:
Seed capital investments	Other non-operating income (expense)	286		(11,465		)	1,752		(8,711		)
Total return swaps	Other non-operating income (expense)	89		(1,797		)	—		—
Total return swap	Other non-operating income (expense)	778		—			—		—

Total gain (loss) from derivatives not designated as hedging instruments		10,819		(19,447		)	15,185		(19,154		)
Derivative designated as a cash flow hedge (See Note 7)
Interest rate swap (termination)	Other non-operating income (expense)	—		—			—		(3,662		)
Interest rate swap	Interest expense	—		—			—		(764		)
Total		$	10,819	$	(19,447	)	$	15,185	$	(23,580	)