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, 2019, the monthly average number of futures contracts bought and sold was 7,586 and 8,587, respectively, and the monthly average number of forward contracts bought and sold was 305 and 266, respectively. For the three and nine months ended September 30, 2018, the monthly average number of futures contracts bought and sold was 16,966 and 20,976, respectively, and the monthly average number of forward contracts bought and sold was 424 and 441, respectively. The following tables summarize the quantitative information required by FASB ASC 815:

Fair Values of Derivative Instruments at September 30, 2019 and December 31, 2018


	Consolidated	Asset		Liability
	Statements of Financial	Derivatives		Derivatives
	Condition Location	9/30/2019		9/30/2019		Fair Value

Agricultural contracts	Net Unrealized gain (loss) on open futures contracts	$	90,053	$	(116,177)	$	(26,124)

Currencies contracts	Net Unrealized gain (loss) on open futures contracts		316,799		(38,718)		278,081

Energy contracts	Net Unrealized gain (loss) on open futures contracts		151,132		(279,118)		(127,986)

Interest rates contracts	Net Unrealized gain (loss) on open futures contracts		262,011		(482,520)		(220,509)

Meats contracts	Net Unrealized gain (loss) on open futures contracts		760		(18,778)		(18,018)

Metals contracts	Net Unrealized gain (loss) on open futures contracts		488,821		(429,896)		58,925

Soft commodities contracts	Net Unrealized gain (loss) on open futures contracts		15,631		(72,951)		(57,320)

Stock indices contracts	Net Unrealized gain (loss) on open futures contracts		223,600		(146,461)		77,139

		$	1,548,807	$	(1,584,619)	$	(35,812)

Forward currency contracts	Net Unrealized gain (loss) on open forward currency contracts	$	183,679	$	(87,578)	$	96,101

Swap Contracts*	Net Unrealized gain (loss) on open swap contracts	$	2,776,688	$	(82,765)	$	2,693,923

*At September 30, 2019, the sector exposure of the CTA indices underlying the swaps was:

Deutsche Bank total return swap, termination date April 30, 2024
Agricultural contracts	2%
Energy contracts	1%
Interest rate contracts	74%
Metals contracts	2%
Stock indices contracts	4%
Forward currency contracts	17%
Total	100%

Deutsche Bank total return swap, termination date July 1, 2020
Interest rate contracts	46%
Stock indices contracts	22%
Forward currency contracts	32%
Total	100%


	Consolidated	Asset		Liability
	Statements of Financial	Derivatives		Derivatives
	Condition Location	12/31/2018		12/31/2018		Fair Value

Agricultural contracts	Net Unrealized gain (loss) on open futures contracts	$	137,471	$	(21,434)	$	116,037

Currencies contracts	Net Unrealized gain (loss) on open futures contracts		319,952		(279,232)		40,720

Energy contracts	Net Unrealized gain (loss) on open futures contracts		213,143		(29,596)		183,547

Interest rates contracts	Net Unrealized gain (loss) on open futures contracts		1,472,305		(230,289)		1,242,016

Meats contracts	Net Unrealized gain (loss) on open futures contracts		34,138		(20,908)		13,230

Metals contracts	Net Unrealized gain (loss) on open futures contracts		489,925		(224,143)		265,782

Soft commodities contracts	Net Unrealized gain (loss) on open futures contracts		149,703		(25,803)		123,900

Stock indices contracts	Net Unrealized gain (loss) on open futures contracts		135,976		(393,667)		(257,691)

		$	2,952,613	$	(1,225,072)	$	1,727,541

Forward currency contracts	Net Unrealized gain (loss) on open forward currency contracts	$	142,015	$	(183,443)	$	(41,428)

Swap Contracts*	Net Unrealized gain (loss) on open swap contracts	$	2,528,979	$	(595,870)	$	1,933,109

*At December 31, 2018, the sector exposure of the CTA indices underlying the swaps was:

Deutsche Bank total return swap, termination date March 29, 2019
Agricultural contracts	4%
Energy contracts	2%
Interest rate contracts	58%
Metals contracts	1%
Stock indices contracts	4%
Forward currency contracts	31%
Total	100%

Deutsche Bank total return swap, termination date July 1, 2020
Interest rate contracts	52%
Stock indices contracts	15%
Forward currency contracts	33%
Total	100%

The Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2019 and 2018


		Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
Type of Contract		September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018

Agriculturals contracts	Net gain (loss) from futures trading	$	63,116	$	(161,208)	$	(31,550)	$	(999,875)
Currencies contracts	Net gain (loss) from futures trading		754,299		(292,778)		(41,445)		(167,862)
Energy contracts	Net gain (loss) from futures trading		(433,057)		84,828		(1,047,055)		1,557,374
Interest rates contracts	Net gain (loss) from futures trading		1,628,379		(1,294,553)		6,672,188		(673,845)
Meats contracts	Net gain (loss) from futures trading		(57,190)		(5,978)		(119,508)		(292,654)
Metals contracts	Net gain (loss) from futures trading		310,738		867,554		529,697		(681,082)
Soft commodities contracts	Net gain (loss) from futures trading		63,227		656,969		(148,220)		1,511,344
Stock indices	Net gain (loss) from futures trading		(406,464)		1,783,370		578,608		(1,804,213)
Forward Currency Contracts	Net gain (loss) from forward trading		73,076		9,437		223,996		20,143
Swap Contracts	Net gain (loss) from swap trading		1,129,397		(540,473)		760,814		419,482

		$	3,125,521	$	1,107,168	$	7,377,525	$	(1,111,188)


Line Item in Consolidated Statement of Operations	Three Months Ended				Nine Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018

Net gain (loss) from futures trading
Realized	$	3,840,920	$	1,054,015	$	8,156,068	$	(995,761)
Change in unrealized		(1,917,872)		584,189		(1,763,353)		(555,052)
Total realized and change in unrealized net gain (loss) from futures trading	$	1,923,048	$	1,638,204	$	6,392,715	$	(1,550,813)

Net gain (loss) from forward trading
Realized	$	28,629	$	262,786	$	86,467	$	159,369
Change in unrealized		44,447		(253,349)		137,529		(139,226)
Total realized and change in unrealized net gain (loss) from forward trading	$	73,076	$	9,437	$	223,996	$	20,143

Net gain (loss) from swap trading
Change in unrealized	$	1,129,397	$	(540,473)	$	760,814	$	419,482
Total realized and change in unrealized net gain (loss) from swap trading	$	1,129,397	$	(540,473)	$	760,814	$	419,482

Total realized and change in unrealized net gain (loss) from futures, forward and swap trading	$	3,125,521	$	1,107,168	$	7,377,525	$	(1,111,188)

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, 2019


					Net Amount of
			Gross Amounts		Unrealized Gain/(Loss)
			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	$	1,548,807	$	(1,584,619)	$	(35,812)
Forward contracts		183,679		(87,578)		96,101
Swap contracts		2,776,688		(82,765)		2,693,923
Total derivatives	$	4,509,174	$	(1,754,962)	$	2,754,212

Offsetting of Derivative Liabilities

As of September 30, 2019


					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	$	1,584,619	$	(1,584,619)	$	—
Forward contracts		87,578		(87,578)		—
Swap contracts		82,765		(82,765)		—
Total derivatives	$	1,754,962	$	(1,754,962)	$	—

Derivatives Assets and Liabilities and Collateral Received by Counterparty

As of September 30, 2019


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

ADM Investor Services, Inc.	$	(9,908)	$	—	$	—	$	(9,908)
Deutsche Bank AG		2,693,923		—		—		2,693,923
SG Americas Securities, LLC		70,197		—		—		70,197
Total	$	2,754,212	$	—	$	—	$	2,754,212

Offsetting of Derivative Assets

As of December 31, 2018


					Net Amount of
			Gross Amounts		Unrealized Gain/(Loss)
			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	$	2,952,613	$	(1,225,072)	$	1,727,541
Forward contracts		142,015		(183,443)		(41,428)
Swap contracts		2,528,979		(595,870)		1,933,109
Total derivatives	$	5,623,607	$	(2,004,385)	$	3,619,222

Offsetting of Derivative Liabilities

As of December 31, 2018


					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	$	1,225,072	$	(1,225,072)	$	—
Forward contracts		183,443		(183,443)		—
Swap contracts		595,870		(595,870)		—
Total derivatives	$	2,004,385	$	(2,004,385)	$	—

Derivatives Assets and Liabilities and Collateral Received by Counterparty

As of December 31, 2018


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

ADM Investor Services, Inc.	$	104,888	$	—	$	—	$	104,888
Deutsche Bank AG		1,933,109		—		—		1,933,109
SG Americas Securities, LLC		1,625,006		—		—		1,625,006
UBS AG		(43,781)		—		—		(43,781)
Total	$	3,619,222	$	—	$	—	$	3,619,222