Derivative Financial Instruments

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

Off-Balance Sheet Risk

Jefferies has contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to resell, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis and underwriting.  Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the fair values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount.  The settlement of these transactions is not expected to have a significant effect upon our consolidated financial statements.

Derivative Financial Instruments

Derivative activities are recorded at fair value in the Consolidated Statements of Financial Condition in Trading assets and Trading liabilities, net of cash paid or received under credit support agreements and on a net counterparty basis when a legal right to offset exists under a master netting agreement.  Net realized and unrealized gains and losses are recognized in Principal transactions in the Consolidated Statements of Operations on a trade date basis and as a component of cash flows from operating activities in the Consolidated Statements of Cash Flows.  Acting in a trading capacity, Jefferies may enter into derivative transactions to satisfy the needs of its clients and to manage its own exposure to market and credit risks resulting from trading activities.  See Notes 3 and 21 for additional disclosures about derivative financial instruments.

Derivatives are subject to various risks similar to other financial instruments, including market, credit and operational risk. The risks of derivatives should not be viewed in isolation, but rather should be considered on an aggregate basis along with our other trading-related activities.  Jefferies manages the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of its firm wide risk management policies.  In connection with Jefferies derivative activities, Jefferies may enter into International Swaps and Derivative Association, Inc. (“ISDA”) master netting agreements and similar agreements with counterparties.  These agreements provide Jefferies with the ability to offset a counterparty’s rights and obligations, request additional collateral when necessary or liquidate the collateral in the event of counterparty default.  See Note 10 for additional information with respect to financial statement offsetting.

The following tables present the fair value and related number of derivative contracts categorized by type of derivative contract as reflected in the Consolidated Statements of Financial Condition at June 30, 2015 and December 31, 2014.  The fair value of assets/liabilities related to derivative contracts represents our receivable/payable for derivative financial instruments, gross of counterparty netting and cash collateral received and pledged (in thousands, except contract amounts):

	Assets				Liabilities
	Fair Value			Number of Contracts	Fair Value			Number of Contracts
June 30, 2015
Interest rate contracts	$	2,638,061		66,294	$	2,599,337		108,220
Foreign exchange contracts	645,414			11,280	655,504			10,370
Equity contracts	971,281			2,910,440	967,926			2,820,958
Commodity contracts	192,476			712,397	151,963			714,850
Credit contracts: centrally cleared swaps	47,813			45	51,038			39
Credit contracts: other credit derivatives	13,474			68	30,934			47
Total	4,508,519				4,456,702
Counterparty/cash-collateral netting	(4,106,430		)		(4,205,980		)
Total per Consolidated Statement of Financial Condition	$	402,089			$	250,722
December 31, 2014
Interest rate contracts	$	2,299,807		71,505	$	2,292,691		89,861
Foreign exchange contracts	1,514,881			12,861	1,519,349			12,752
Equity contracts	1,050,990			2,271,507	1,058,015			2,051,469
Commodity contracts	276,726			1,031,568	303,206			1,020,418
Credit contracts: centrally cleared swaps	17,831			27	23,264			22
Credit contracts: other credit derivatives	5,378			18	23,608			27
Total	5,165,613				5,220,133
Counterparty/cash-collateral netting	(4,759,345		)		(4,856,618		)
Total per Consolidated Statement of Financial Condition	$	406,268			$	363,515

The following table presents unrealized and realized gains (losses) on derivative contracts for the three and six months ended June 30, 2015 and 2014 (in thousands):

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
Interest rate contracts	$	18,064		$	(61,367	)	$	(24,728	)	$	(66,485	)
Foreign exchange contracts	8,352			(3,718		)	23,524			2,348
Equity contracts	(111,682		)	(73,925		)	(40,641		)	(170,161		)
Commodity contracts	5,746			21,793			20,237			37,980
Credit contracts	9,805			(11,745		)	3,763			(15,623		)
Total	$	(69,715	)	$	(128,962	)	$	(17,845	)	$	(211,941	)

OTC Derivatives.  The following tables set forth by remaining contract maturity the fair value of OTC derivative assets and liabilities as reflected in the Consolidated Statement of Financial Condition at June 30, 2015 (in thousands):

	OTC Derivative Assets (1) (2) (3)
	0-12 Months		1-5 Years		Greater Than 5 Years		Cross- Maturity Netting (4)			Total
Commodity swaps, options and forwards	$	50,402	$	1,592	$	21,717	$	(3,562	)	$	70,149
Equity swaps and options	12,791		13,371		5,349		—			31,511
Credit default swaps	—		2,045		7,067		(1,519		)	7,593
Total return swaps	10,160		2,635		—		(2,564		)	10,231
Foreign currency forwards, swaps and options	143,252		30,561		—		(13,178		)	160,635
Interest rate swaps, options and forwards	47,927		155,590		95,763		(64,051		)	235,229
Total	$	264,532	$	205,794	$	129,896	$	(84,874	)	515,348
Cross product counterparty netting										(16,998		)
Total OTC derivative assets included in Trading assets										$	498,350

(1) At June 30, 2015, we held exchange traded derivative assets and other credit agreements with a fair value of $94.1 million, which are not included in this table.

(2) OTC derivative assets in the table above are gross of collateral received.  OTC derivative assets are recorded net of collateral received in the Consolidated Statements of Financial Condition.  At June 30, 2015 cash collateral received was $190.4 million.

(3) Derivative fair values include counterparty netting within product category.

(4) Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.

	OTC Derivative Liabilities (1) (2) (3)
	0-12 Months		1-5 Years		Greater Than 5 Years		Cross-Maturity Netting (4)			Total
Commodity swaps, options and forwards	$	51,982	$	693	$	3,474	$	(3,562	)	$	52,587
Equity swaps and options	28,147		37,353		15,332		—			80,832
Credit default swaps	1,064		1,334		5,636		(1,519		)	6,515
Total return swaps	21,311		9		1,489		(2,564		)	20,245
Foreign currency forwards, swaps and options	121,295		62,607		—		(13,178		)	170,724
Fixed income forwards	278		—		—		—			278
Interest rate swaps, options and forwards	45,926		96,089		120,986		(64,051		)	198,950
Total	$	270,003	$	198,085	$	146,917	$	(84,874	)	530,131
Cross product counterparty netting										(16,998		)
Total OTC derivative liabilities included in Trading liabilities										$	513,133

(1) At June 30, 2015, we held exchange traded derivative liabilities and other credit agreements with a fair value of $27.7 million, which are not included in this table.

(2) OTC derivative liabilities in the table above are gross of collateral pledged. OTC derivative liabilities are recorded net of collateral pledged in the Consolidated Statements of Financial Condition.  At June 30, 2015, cash collateral pledged was $290.1 million.

(3) Derivative fair values include counterparty netting within product category.

(4) Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.

At June 30, 2015, the counterparty credit quality with respect to the fair value of our OTC derivative assets was as follows (in thousands):

Counterparty credit quality (1):
A- or higher	$	178,941
BBB- to BBB+	129,161
BB+ or lower	84,507
Unrated	105,741
Total	$	498,350

(1) We utilize internal credit ratings determined by Jefferies Risk Management.  Credit ratings determined by Risk Management use methodologies that produce ratings generally consistent with those produced by external rating agencies.

Contingent Features

Certain of Jefferies derivative instruments contain provisions that require their debt to maintain an investment grade credit rating from each of the major credit rating agencies.  If Jefferies debt were to fall below investment grade, it would be in violation of these provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on Jefferies 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 June 30, 2015 and December 31, 2014 is $106.1 million and $269.0 million, respectively, for which Jefferies has posted collateral of $97.9 million and $234.6 million, respectively, in the normal course of business.  If the credit-risk-related contingent features underlying these agreements were triggered on June 30, 2015 and December 31, 2014, Jefferies would have been required to post an additional $10.8 million and $55.1 million, respectively, of collateral to its counterparties.