DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Sep. 30, 2011

DERIVATIVE FINANCIAL INSTRUMENTS [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 15 – DERIVATIVE FINANCIAL INSTRUMENTS

We enter into interest rate swaps and futures contracts either as part of our fixed income business to facilitate customer transactions, to hedge a portion of our trading inventory, or for our own account.   The majority of our derivative positions are executed in the over-the-counter market with financial institutions. These positions are recorded at fair value with the related gain or loss and interest recorded in earnings within the Consolidated Statements of Income and Comprehensive Income.  The revenue related to the interest rate contracts includes realized and unrealized gains and losses on derivative instruments.  Cash flows related to these fixed income interest rate contracts are included as operating activities (the “trading instruments, net” line) on the Consolidated Statements of Cash Flows for the period.

We elect to net-by-counterparty the fair value of interest rate swap contracts entered into by our fixed income trading group.  Certain of these contracts contain a legally enforceable master netting arrangement that allows for netting of all individual swap receivables and payables with each counterparty and, therefore, the fair value of those swap contracts are netted by counterparty in the Consolidated Statements of Financial Condition.  The credit support annex allows parties to the master agreement to mitigate their credit risk by requiring the party which is out of the money to post collateral.  As we elect to net-by-counterparty the fair value of interest rate swap contracts, we also net-by-counterparty any collateral exchanged as part of the swap agreement.  This cash collateral is recorded net-by-counterparty at the related fair value.  The cash collateral included in the net fair value of all open derivative asset positions aggregates to a net liability of $19 million at September 30, 2011 and a net asset of $10.6 million at September 30, 2010.  The cash collateral included in the net fair value of all open derivative liability positions aggregates to a net asset of $37 million at September 30, 2011 and net liability $1.8 million at September 30, 2010.  Our maximum loss exposure under these interest rate swap contracts at September 30, 2011 is $39 million.

None of our derivatives are designated as fair value or cash flow hedges.

See the table below for the notional and fair value amounts of both the asset and liability derivatives.

	Asset derivatives
	September 30, 2011			September 30, 2010
	Balance sheet location	Notional amount	Fair value(1)	Balance sheet location	Notional amount	Fair value(1)
	(in thousands)
Derivatives not designated as hedging instruments:
Interest rate contracts	Trading instruments	$           2,248,150	$       126,867	Trading instruments	$           1,130,767	$       102,490

(1)   The fair value in this table is presented on a gross basis before netting of cash collateral and by counterparty according to our legally enforceable master netting arrangements. The fair value in the Consolidated Statements of Financial Condition is presented net.

	Liabilities derivatives
	September 30, 2011			September 30, 2010
	Balance sheet location	Notional amount	Fair value(1)	Balance sheet location	Notional amount	Fair value(1)
	(in thousands)
Derivatives not designated as hedging instruments:
Interest rate contracts	Trading instruments sold	$           1,722,820	$       112,457	Trading instruments sold	$           1,172,927	$       86,039

(1)   The fair value in this table is presented on a gross basis before netting of cash collateral and by counterparty according to our legally enforceable master netting arrangements. The fair value in the Consolidated Statements of Financial Condition is presented net.

See the table below for the impact of the derivatives not designated as hedging instruments on the Consolidated Statements of Income and Comprehensive Income:

		Amount of gain (loss) on derivatives recognized in income
		Fiscal year ended September 30,
	Location of gain (loss) recognized on derivatives in Consolidated Statements of Income and Comprehensive Income	2011		2010			2009
		(in thousands)
Derivatives not designated as hedging instruments:
Interest rate contracts	Net trading profits	$	750	$	(3,471	)	$	(505	)
	Other revenues		-		(297	)		(1,004	)

We are exposed to credit losses in the event of nonperformance by the counterparties to our interest rate derivative agreements.  We perform a credit evaluation of counterparties prior to entering into derivative transactions and we monitor their credit standings.  Currently, we anticipate that all of the counterparties will be able to fully satisfy their obligations under those agreements.  We may require collateral in the form of cash deposits from counterparties to support these obligations as established by the credit threshold specified by the agreement and/or as a result of monitoring the credit standing of the counterparties.  We are also exposed to interest rate risk related to our interest rate derivative agreements.  For the derivatives included in trading instruments and trading instruments sold on our Consolidated Statements of Financial Condition, we monitor exposure in our derivative agreements daily based on established limits with respect to a number of factors, including interest rate, spread, ratio, basis and volatility risks.  These exposures are monitored both on a total portfolio basis and separately for each agreement for selected maturity periods.