Note 10. Derivative Instruments

The Partnership follows the provisions of FASB ASC 815, Derivatives and Hedging. FASB ASC 815 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. FASB ASC 815 applies to all derivative instruments within the scope of FASB ASC 815-10-05. It also applies to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under FASB ASC 815-10-05. FASB ASC 815 amends the current qualitative and quantitative disclosure requirements for derivative instruments and hedging activities set forth in FASB ASC 815-10-05 and generally increases the level of disaggregation that will be required in an entity’s financial statements. FASB ASC 815 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements (see Trading Activities and Related Risks, Note 8).

The Partnership’s business is speculative trading. The Partnership intends to close out all futures, options on futures and forward contracts prior to their expiration. The Partnership trades in futures and other commodity interest contracts and is therefore a party to financial instruments with elements of off-balance sheet market risk and credit risk. In entering into these contracts, the Partnership faces the market risk that these contracts may be significantly influenced by market conditions, such as interest rate volatility, resulting in such contracts being less valuable. The Partnership minimizes market risk through real-time monitoring of open positions, diversification of the portfolio and maintenance of a margin-to-equity ratio that rarely exceeds 25%.

In addition to market risk, in entering into commodity interest contracts there is a credit risk that a counterparty will not be able to meet its obligations to the Partnership. In general, clearing organizations are backed by the corporate members of the clearing organization who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases in which the clearing organization is not backed by the clearing members, like some non-U.S. exchanges, it is normally backed by a consortium of banks or other financial institutions.

In the case of forward contracts, over-the-counter options contracts or swap contracts, which are traded on the interbank or other institutional market rather than on exchanges, the counterparty is generally a single bank or other financial institution, rather than a central clearing organization backed by a group of financial institutions. As a result, there will likely be greater counterparty credit risk in these transactions. The Partnership trades only with those counterparties that it believes to be creditworthy. Nonetheless, the clearing member, clearing organization or other counterparty to these transactions may not be able to meet its obligations to the Partnership, in which case the Partnership could suffer significant losses on these contracts.

The Partnership does not designate any derivative instruments as hedging instruments under FASB ASC 815-10-05.

For the three and nine months ended September 30, 2017, the monthly average futures contracts bought and sold was approximately 34,978 and 40,609, respectively, and the monthly average forward contracts bought and sold was approximately 626 and 578, respectively. For the three and nine months ended September 30, 2016, the monthly average futures contracts bought and sold was approximately 46,743 and 51,975, respectively, and the monthly average forward contracts bought and sold was approximately 532 and 515, respectively. The following tables summarize the quantitative information required by FASB ASC 815:

Fair Values of Derivative Instruments at September 30, 2017 and December 31, 2016


	Consolidated	Asset			Liability
	Statements of Financial	Derivatives			Derivatives
	Condition Location	9/30/2017			9/30/2017		Fair Value

Agricultural contracts	Net Unrealized gain (loss) on open futures contracts	$	112,923		$	(188,652)	$	(75,729)

Currencies contracts	Net Unrealized gain (loss) on open futures contracts		219,197			(661,793)		(442,596)

Energy contracts	Net Unrealized gain (loss) on open futures contracts		340,682			(312,947)		27,735
				.
Interest rates contracts	Net Unrealized gain (loss) on open futures contracts		485,531			(950,806)		(465,275)

Meats contracts	Net Unrealized gain (loss) on open futures contracts		49,816			(58,162)		(8,346)

Metals contracts	Net Unrealized gain (loss) on open futures contracts		949,761			(939,436)		10,325

Soft commodities contracts	Net Unrealized gain (loss) on open futures contracts		189,249			(37,859)		151,390

Stock indices contracts	Net Unrealized gain (loss) on open futures contracts		1,671,511			(571,762)		1,099,749

		$	4,018,670		$	(3,721,417)	$	297,253

Forward currency contracts	Net Unrealized gain (loss) on open forward currency contracts	$	426,813		$	(941,210)	$	(514,397)

Swap Contracts*	Net Unrealized gain (loss) on open swap contracts	$	1,833,011		$	(1,970,452)	$	(137,441)

*At September 30, 2017, the sector exposure of the CTA indices underlying the swaps was:

Deutsche Bank total return swap, termination date March 29, 2019
Agricultural contracts	2%
Energy contracts	1%
Interest rate contracts	62%
Metals contracts	1%
Stock indices contracts	16%
Forward currency contracts	18%
Total	100%

Deutsche Bank total return swap, termination date July 1, 2020
Interest rate contracts	42%
Stock indices contracts	12%
Forward currency contracts	46%
Total	100%


	Consolidated	Asset			Liability
	Statements of Financial	Derivatives			Derivatives
	Condition Location	12/31/2016			12/31/2016		Fair Value

Agricultural contracts	Net Unrealized gain (loss) on open futures contracts	$	121,013		$	(261,721)	$	(140,708)

Currencies contracts	Net Unrealized gain (loss) on open futures contracts		763,565			(345,781)		417,784

Energy contracts	Net Unrealized gain (loss) on open futures contracts		562,341			(18,461)		543,880
				.
Interest rates contracts	Net Unrealized gain (loss) on open futures contracts		578,244			(326,726)		251,518

Meats contracts	Net Unrealized gain (loss) on open futures contracts		79,821			(10,487)		69,334

Metals contracts	Net Unrealized gain (loss) on open futures contracts		1,604,965			(1,282,731)		322,234

Soft commodities contracts	Net Unrealized gain (loss) on open futures contracts		344,652			(86,579)		258,073

Stock indices contracts	Net Unrealized gain (loss) on open futures contracts		1,111,526			(553,717)		557,809

		$	5,166,127		$	(2,886,203)	$	2,279,924

Forward currency contracts	Net Unrealized gain (loss) on open forward currency contracts	$	556,627		$	(555,922)	$	705

Swap Contracts*	Net Unrealized gain (loss) on open swap contracts	$	404,566		$	(1,139,264)	$	(734,698)

*At December 31, 2016, the sector exposure of the CTA indices underlying the swaps was:

Deutsche Bank total return swap, termination date March 29, 2019
Agricultural contracts	3%
Energy contracts	1%
Interest rate contracts	53%
Metals contracts	3%
Stock indices contracts	15%
Forward currency contracts	25%
Total	100%

Deutsche Bank total return swap, termination date July 1, 2020
Interest rate contracts	61%
Stock indices contracts	10%
Forward currency contracts	29%
Total	100%

The Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2017 and 2016


		Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
Type of Contract		September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016

Agriculturals contracts	Net gain (loss) from futures trading	$	(1,293,249)	$	(344,464)	$	(2,371,623)	$	1,705,400
Currencies contracts	Net gain (loss) from futures trading		465,911		(1,179,735)		(2,630,140)		(2,620,498)
Energy contracts	Net gain (loss) from futures trading		(398,756)		(3,845,918)		(7,007,122)		(1,192,066)
Interest rates contracts	Net gain (loss) from futures trading		(1,446,217)		(2,588,887)		(7,567,144)		21,639,195
Meats contracts	Net gain (loss) from futures trading		(383,441)		726,212		333,991		305,094
Metals contracts	Net gain (loss) from futures trading		399,336		(1,077,129)		(2,207,600)		(3,357,713)
Soft commodities contracts	Net gain (loss) from futures trading		(785,380)		495,726		382,280		(506,213)
Stock indices	Net gain (loss) from futures trading		3,790,195		4,274,961		17,060,597		2,368,613
Forward Currency Contracts	Net gain (loss) from forward trading		(13,784)		(177,604)		(1,649,376)		402,932
Swap Contracts	Net gain (loss) from swap trading		460,436		692,037		597,256		(3,862,738)

		$	795,051	$	(3,024,801)	$	(5,058,881)	$	14,882,006


Line Item in Consolidated Statement of Operations	Three Months Ended				Nine Months Ended
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016

Net gain (loss) from futures trading
Realized	$	(3,624,312)	$	1,523,704	$	(2,024,091)	$	16,121,355
Change in unrealized		3,972,712		(5,062,938)		(1,982,669)		2,220,457
Total realized and change in unrealized net gain (loss) from futures trading	$	348,400	$	(3,539,234)	$	(4,006,760)	$	18,341,812

Net gain (loss) from forward trading
Realized	$	513,204	$	220,489	$	(1,134,274)	$	(163,404)
Change in unrealized		(526,989)		(398,093)		(515,103)		566,336
Total realized and change in unrealized net gain (loss) from forward trading	$	(13,785)	$	(177,604)	$	(1,649,377)	$	402,932

Net gain (loss) from swap trading
Change in unrealized	$	460,436	$	692,037	$	597,256	$	(3,862,738)
Total realized and change in unrealized net gain (loss) from swap trading	$	460,436	$	692,037	$	597,256	$	(3,862,738)

Total realized and change in unrealized net gain (loss) from futures, forward and swap trading	$	795,051	$	(3,024,801)	$	(5,058,881)	$	14,882,006

The tables below show the gross amounts of recognized derivative assets and gross amounts offset in the accompanying Consolidated Statements of Financial Condition:

Offsetting of Derivative Assets

As of September 30, 2017


					Net Amount of
			Gross Amounts		Unrealized Gain
			Offset in the		Presented in
	Gross Amount of		Consolidated		the Consolidated
	Recognized		Statement of		Statement of
Type of Instrument	Assets		Financial Condition		Financial Condition

U.S. and foreign futures contracts	$	4,018,670	$	(3,721,417)	$	297,253
Forward contracts		426,813		(941,210)		(514,397)
Swap contracts		1,833,011		(1,970,452)		(137,441)
Total derivatives	$	6,278,494	$	(6,633,079)	$	(354,585)

Offsetting of Derivative Liabilities

As of September 30, 2017


					Net Amount of
			Gross Amounts		Unrealized Gain
			Offset in the		Presented in
	Gross Amount of		Consolidated		the Consolidated
	Recognized		Statement of		Statement of
Type of Instrument	Liabilities		Financial Condition		Financial Condition

U.S. and foreign futures contracts	$	3,721,417	$	(3,721,417)	$	—
Forward contracts		941,210		(941,210)		—
Swap contracts		1,970,452		(1,970,452)		—
Total derivatives	$	6,633,079	$	(6,633,079)	$	—

Derivatives Assets and Liabilities and Collateral Received by Counterparty

As of September 30, 2017


			Gross Amounts Not Offset in the Consolidated
			Statement of Financial Condition
	Net Amount of
	Unrealized Gain
	Presented in
	the Consolidated
	Statement of		Financial		Cash Collateral
Counterparty	Financial Condition		Instruments		Received		Net Amount

Deutsche Bank AG	$	(137,441)	$	—	$	—	$	(137,441)
SG Americas Securities, LLC		32,628		—		—		32,628
UBS AG		(510,029)		—		—		(510,029)
Wells Fargo Securities, LLC		260,257		—		—		260,257
Total	$	(354,585)	$	—	$	—	$	(354,585)

Offsetting of Derivative Assets

As of December 31, 2016


					Net Amount of
			Gross Amounts		Unrealized Gain
			Offset in the		Presented in
	Gross Amount of		Consolidated		the Consolidated
	Recognized		Statement of		Statement of
Type of Instrument	Assets		Financial Condition		Financial Condition

U.S. and foreign futures contracts	$	5,166,127	$	(2,886,203)	$	2,279,924
Forward contracts		556,627		(555,922)		705
Swap contracts		404,566		(1,139,264)		(734,698)
Total derivatives	$	6,127,320	$	(4,581,389)	$	1,545,931

Offsetting of Derivative Liabilities

As of December 31, 2016


					Net Amount of
			Gross Amounts		Unrealized Gain
			Offset in the		Presented in
	Gross Amount of		Consolidated		the Consolidated
	Recognized		Statement of		Statement of
Type of Instrument	Liabilities		Financial Condition		Financial Condition

U.S. and foreign futures contracts	$	2,886,203	$	(2,886,203)	$	—
Forward contracts		555,922		(555,922)		—
Swap contracts		1,139,264		(1,139,264)		—
Total derivatives	$	4,581,389	$	(4,581,389)	$	—

Derivatives Assets and Liabilities and Collateral Received by Counterparty

As of December 31, 2016


			Gross Amounts Not Offset in the Consolidated
			Statement of Financial Condition
	Net Amount of
	Unrealized Gain
	Presented in
	the Consolidated
	Statement of		Financial		Cash Collateral
Counterparty	Financial Condition		Instruments		Received		Net Amount

Deutsche Bank AG	$	(734,698)	$	—	$	—	$	(734,698)
SG Americas Securities, LLC		1,582,067		—		—		1,582,067
UBS AG		(40,113)		—		—		(40,113)
Wells Fargo Securities, LLC		738,675		—		—		738,675
Total	$	1,545,931	$	—	$	—	$	1,545,931