DERIVATIVE FINANCIAL INSTRUMENTS

The significant accounting policies governing our derivative financial instruments, including our methodologies for determining fair value, are described in Note 2 on pages 108 - 109 of our 2015 Form 10-K.

Derivatives arising from our fixed income business operations

We enter into derivatives contracts as part of our fixed income operations in either over-the-counter market activities, or through “matched book” activities. Each of these activities are described further below.

We enter into interest rate swaps, futures contracts and forward foreign exchange contracts either as part of our fixed income business to facilitate client transactions, to hedge a portion of our trading inventory, or to a limited extent for our own account. The majority of these derivative positions are executed in the over-the-counter market either directly with financial institutions or trades cleared through an exchange (together referred to as the “OTC Derivatives Operations”). Cash flows related to the interest rate contracts arising from the OTC Derivative Operations are included as operating activities (the “trading instruments, net” line) on the Condensed Consolidated Statements of Cash Flows.

Raymond James Financial Products, Inc. (“RJFP”), a wholly owned subsidiary, may enter into derivative transactions (primarily interest rate swaps) with clients. For every derivative transaction RJFP enters into with a customer, RJFP enters into an offsetting transaction, on terms that mirror the customer transaction, with a credit support provider which is a third party financial institution. Due to this “pass-through” transaction structure, RJFP has completely mitigated the market and credit risk related to these derivative contracts. Therefore, the ultimate credit and market risk resides with the third party financial institution. RJFP only has credit risk related to its uncollected derivative transaction fee revenues. In these activities, we do not use derivative instruments for trading or hedging purposes. As a result of the structure of these transactions, we refer to the derivative contracts we enter into as a result of these operations as our offsetting “matched book” derivative operations (the “Offsetting Matched Book Derivatives Operations”).

Any collateral required to be exchanged under the contracts arising from the Offsetting Matched Book Derivatives Operations is administered directly by the client and the third party financial institution. RJFP does not hold any collateral, or administer any collateral transactions, related to these instruments. We record the value of each derivative position arising from the Offsetting Matched Book Derivatives Operations at fair value, as either an asset or offsetting liability, presented as “derivative instruments associated with offsetting matched book positions,” as applicable, on our Condensed Consolidated Statements of Financial Condition.

The receivable for uncollected derivative transaction fee revenues of RJFP is $7 million at both March 31, 2016 and September 30, 2015, and is included in other receivables on our Condensed Consolidated Statements of Financial Condition.

None of the derivatives described above arising from either our OTC Derivatives Operations or our Offsetting Matched Book Derivatives Operations are designated as fair value or cash flow hedges.

Derivatives arising from RJ Bank’s business operations

We enter into derivatives contracts as part of RJ Bank’s business operations through its hedging activities, which include forward foreign exchange contracts and interest rate swaps (see Note 2 on page 109 of the 2015 Form 10-K for the accounting policies associated with these transactions). Each of these activities is described further below.

A Canadian subsidiary of RJ Bank conducts operations directly related to RJ Bank’s Canadian dollar-denominated corporate loan portfolio. U.S. subsidiaries of RJ Bank utilize forward foreign exchange contracts to hedge RJ Bank’s foreign currency exposure due to its non-U.S. dollar net investment. Cash flows related to these derivative contracts are classified within operating activities in the Condensed Consolidated Statements of Cash Flows.

The cash flows associated with certain assets held by RJ Bank provide interest income at fixed interest rates. Therefore, the value of these assets, absent any risk mitigation, is subject to fluctuation based upon changes in market rates of interest over time. Beginning in February 2015, we entered into certain interest rate swap contracts (the “RJ Bank Interest Hedges”) which swap variable interest payments on certain debt for fixed interest payments. Through the RJ Bank Interest Hedges, RJ Bank is able to mitigate a portion of the market risk associated with certain fixed interest earning assets held by RJ Bank.

Description of the collateral we hold related to derivative contracts

Where permitted, we elect to net-by-counterparty certain derivative contracts entered into in our OTC Derivatives Operations. Certain of these contracts contain a legally enforceable master netting arrangement that allows for netting of all derivative transactions with each counterparty and, therefore, the fair value of those derivative contracts are netted by counterparty in the Condensed Consolidated Statements of Financial Condition. The credit support annex related to the interest rate swaps and certain forward foreign exchange contracts allows parties to the master agreement to mitigate their credit risk by requiring the party which is out of the money to post collateral. We accept collateral in the form of cash or other marketable securities. As we elect to net-by-counterparty the fair value of derivative contracts arising from our OTC Derivatives Operations, we also net-by-counterparty any cash collateral exchanged as part of those derivative agreements. Refer to Note 14 for additional information regarding offsetting asset and liability balances. 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 arising from our OTC Derivatives Operations aggregates to a net liability of $59 million as of March 31, 2016 and $44 million as of September 30, 2015. The cash collateral included in the net fair value of all open derivative liability positions from our OTC Derivatives Operations aggregates to a net asset of $26 million at both March 31, 2016 and September 30, 2015. Our maximum loss exposure under the interest rate swap contracts arising from our OTC Derivatives Operations at March 31, 2016 is $52 million.

RJ Bank provides to counterparties for the benefit of its U.S. subsidiaries, a guarantee of payment in the event of the subsidiaries’ default under forward foreign exchange contracts. Due to this RJ Bank guarantee and the short-term nature of these derivatives, RJ Bank’s U.S. subsidiaries are not required to post collateral and do not receive collateral with respect to certain derivative contracts with the respective counterparties. Our maximum loss exposure under the forward foreign exchange contracts arising from RJ Bank’s business operations at March 31, 2016 is $200 thousand.

Derivative balances included in our financial statements

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



	Asset derivatives
	March 31, 2016						September 30, 2015
	Balance sheet location	Notional amount			Fair value⁽¹⁾		Balance sheet location	Notional amount			Fair value⁽¹⁾
	(in thousands)
Derivatives designated as hedging instruments:
Forward foreign exchange contracts ⁽²⁾	Prepaid expenses and other assets	$	768,800	⁽³⁾	$	2,257	Prepaid expenses and other assets	$	752,600	⁽³⁾	$	613
Derivatives not designated as hedging instruments:
Interest rate contracts ⁽⁴⁾	Trading instruments	$	1,940,004		$	138,228	Trading instruments	$	2,473,946		$	130,095
Interest rate contracts ⁽⁵⁾	Derivative instruments associated with offsetting matched book positions	$	1,507,020		$	396,163	Derivative instruments associated with offsetting matched book positions	$	1,649,863		$	389,457
Forward foreign exchange contracts ⁽⁴⁾	Trading instruments	$	108,462	⁽³⁾	$	9,677	Trading instruments	$	74,873	⁽³⁾	$	2,612
Forward foreign exchange contracts ⁽²⁾	Prepaid expenses and other assets	$	181,000	⁽³⁾	$	681	Prepaid expenses and other assets	$	214,300	⁽³⁾	$	304
	Liability derivatives
Derivatives designated as hedging instruments:
Interest rate contracts ⁽⁶⁾	Trade and other payables	$	450,000		$	20,803	Trade and other payables	$	300,000		$	7,545
Forward foreign exchange contracts ⁽²⁾	Trade and other payables	$	100,400	⁽³⁾	$	84	Trade and other payables	$	—		$	—
Derivatives not designated as hedging instruments:
Interest rate contracts ⁽⁴⁾	Trading instruments sold	$	1,928,733		$	130,702	Trading instruments sold	$	1,906,766		$	104,255
Interest rate contracts ⁽⁵⁾	Derivative instruments associated with offsetting matched book positions	$	1,507,020		$	396,163	Derivative instruments associated with offsetting matched book positions	$	1,649,863		$	389,457
Forward foreign exchange contracts ⁽⁴⁾	Trading instruments sold	$	119,856	⁽³⁾	$	4,939	Trading instruments sold	$	136,710	⁽³⁾	$	4,865
Forward foreign exchange contracts ⁽²⁾	Trade and other payables	$	139,300	⁽³⁾	$	117	Trade and other payables	$	—		$	—


(1)	The fair value in this table is presented on a gross basis before netting of cash collateral and before any netting by counterparty according to our legally enforceable master netting arrangements. The fair value in the Condensed Consolidated Statements of Financial Condition is presented net. See Note 14 for additional information regarding offsetting asset and liability balances.


(2)	These contracts are associated with RJ Bank’s activities to hedge its foreign currency exposure.


(3)	The notional amount presented is denominated in Canadian currency.


(4)	These contracts arise from our OTC Derivatives Operations.


(5)	These contracts arise from our Offsetting Matched Book Derivatives Operations.


(6)	These contracts are associated with our RJ Bank Interest Hedges activities.

Gains (losses) recognized in AOCI, net of income taxes on derivatives are as follows (see Note 17 for additional information):



	Three months ended March 31,						Six months ended March 31,
	2016			2015			2016			2015
	(in thousands)
Forward foreign exchange contracts	$	(23,411	)	$	30,519		$	(11,174	)	$	43,577
RJ Bank Interest Hedges	(11,469		)	(1,501		)	(8,204		)	(1,501		)
Total (losses) gains recognized in AOCI, net of taxes	$	(34,880	)	$	29,018		$	(19,378	)	$	42,076

There was no hedge ineffectiveness and no components of derivative gains or losses were excluded from the assessment of hedge effectiveness for the each of the three and six months ended March 31, 2016 and 2015. We expect to reclassify an estimated $6.1 million as additional interest expense out of AOCI and into earnings within the next 12 months. The maximum length of time over which forecasted transactions are or will be hedged is ten years.

The table below sets forth the impact of the derivatives not designated as hedging instruments on the Condensed Consolidated Statements of Income and Comprehensive Income:



	Location of gain (loss) recognized on derivatives in the Condensed Consolidated Statements of Income and Comprehensive Income	Amount of gain (loss) on derivatives recognized in income
		Three months ended March 31,					Six months ended March 31,
		2016			2015		2016			2015
		(in thousands)
Derivatives not designated as hedging instruments:
Interest rate contracts and forward foreign exchange contracts ⁽¹⁾	Net trading profit	$	1,365		$	2,403	$	1,773		$	2,280
Interest rate contracts ⁽²⁾	Other revenues	$	23		$	44	$	46		$	66
Forward foreign exchange contracts ⁽³⁾	Other revenues	$	(12,970	)	$	8,683	$	(7,412	)	$	12,305


(1)	These contracts arise from our OTC Derivatives Operations.


(2)	These contracts arise from our Offsetting Matched Book Derivatives Operations.


(3)	These contracts are associated with RJ Bank’s activities to hedge its foreign currency exposure.

Risks associated with, and our risk mitigation related to, our derivative contracts

We are exposed to credit losses in the event of nonperformance by the counterparties to forward foreign exchange derivative agreements, futures contracts and the interest rate contracts associated with our OTC Derivatives Operations that are not cleared through an exchange. Where we are subject to credit exposure, 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. For our OTC Derivatives Operations that are not cleared through an exchange, we may require collateral from counterparties in the form of cash deposits or other marketable securities to support certain of 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 required to maintain cash or marketable security deposits with the exchange we utilize to clear our OTC Derivatives transactions that are cleared through such exchanges. These deposits are a component of deposits with clearing organizations on our Condensed Consolidated Statements of Financial Condition.

We are exposed to interest rate risk related to the interest rate derivative agreements arising from certain of our OTC Derivatives Operations and RJ Bank Interest Hedges. We are also exposed to foreign exchange risk related to our futures contracts and forward foreign exchange derivative agreements. We monitor exposure in our derivative agreements which we have risk daily based on established limits with respect to a number of factors, including interest rate, foreign exchange spot and forward rates, 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.

Certain of the derivative instruments arising from our OTC Derivatives Operations and from RJ Bank’s forward foreign exchange contracts contain provisions that require our debt to maintain an investment grade rating from one or more of the major credit rating agencies. If our debt were to fall below investment grade, we would be in breach of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing overnight collateralization on our derivative instruments in liability positions. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a liability position at March 31, 2016 is $69.4 million, for which we have posted collateral of $67.9 million in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on March 31, 2016, we would have been required to post an additional $1.5 million of collateral to our counterparties.

Our only exposure to credit risk in the Offsetting Matched Book Derivatives Operations is related to our uncollected derivative transaction fee revenues. We are not exposed to market risk as it relates to these derivative contracts due to the “pass-through” transaction structure previously described.