v2.4.0.6
DERIVATIVE FINANCIAL INSTRUMENTS
 6 Months Ended
Jun. 30, 2012
DERIVATIVE FINANCIAL INSTRUMENTS
6. DERIVATIVE FINANCIAL INSTRUMENTS

Blackstone  enters into derivative contracts in order to hedge its interest rate risk exposure against the effects of interest rate changes. Additionally, Blackstone and the Blackstone Funds enter into derivative contracts in the normal course of business to achieve certain other risk management objectives and for general investment purposes. As a result of the use of derivative contracts, Blackstone and the consolidated Blackstone Funds are exposed to the risk that counterparties will fail to fulfill their contractual obligations. To mitigate such counterparty risk, Blackstone and the consolidated Blackstone Funds enter into contracts with certain major financial institutions, all of which have investment grade ratings. Counterparty credit risk is evaluated in determining the fair value of derivative instruments.

Fair Value Hedges

In June 2012, Blackstone removed the fair value designation of its interest rate swaps that were used to hedge a portion of the interest rate risk on the Partnership’s fixed rate borrowings. The impact to the Condensed Consolidated Statements of Operations for the period up through the date of de-designation is reflected within “Fair Value Hedges” in the table below. Changes in the fair value of the interest rate swaps subsequent to the date of de-designation are reflected within Freestanding Derivatives within Interest Rate Contracts in the table below.

Freestanding Derivatives

Freestanding derivatives are instruments that Blackstone and certain of the consolidated Blackstone Funds have entered into as part of their overall risk management and investment strategies. These derivative contracts are not designated as hedging instruments for accounting purposes. Such contracts may include foreign exchange contracts, equity swaps, options, futures and other derivative contracts.

The table below summarizes the aggregate notional amount and fair value of the derivative financial instruments. The notional amount represents the absolute value amount of all outstanding derivative contracts.

 

    June 30, 2012     December 31, 2011  
    Assets     Liabilities     Assets     Liabilities  
    Notional     Fair
Value		     Notional     Fair
Value		     Notional     Fair
Value		     Notional     Fair
Value		  

Fair Value Hedges

                

Interest Rate Swaps

   $ —        $ —        $ —        $ —        $ 450,000      $ 67,668      $ —        $ —     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Freestanding Derivatives

                

Blackstone — Other

                

Interest Rate Contracts

     905,450        52,009        770,950        2,565        221,350        768        502,200        1,291   

Foreign Currency Contracts

     4,167        173        7,275        125        22,698        1,016        7,293        103   

Credit Default Swaps

     —          —          600        110        —          —          —          —     

Investments of Consolidated Blackstone Funds

                

Foreign Currency Contracts

     310,558        38,247        362,534        31,133        177,453        22,016        159,409        7,687   

Interest Rate Contracts

     176,495        8,203        176,400        4,103        95,482        7,270        191,400        10,867   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Freestanding Derivatives

     1,396,670        98,632        1,317,759        38,036        516,983        31,070        860,302        19,948   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 1,396,670      $ 98,632      $ 1,317,759      $ 38,036      $ 966,983      $ 98,738      $ 860,302      $ 19,948   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

The table below summarizes the impact to the Condensed Consolidated Statements of Operations from derivative financial instruments:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
         2012             2011             2012             2011      

Fair Value Hedges — Interest Rate Swaps

         

Hedge Ineffectiveness

    $ 1,342      $ 1,164      $ 548      $ 597   
  

 

 

    

 

 

    

 

 

    

 

 

  

Excluded from Assessment of Effectiveness

    $ 4,950      $ 7,049      $ (938 )    $ (374 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Realized Gain

      22,941        —          22,941        —     

Freestanding Derivatives

         

Realized Gains (Losses)

         

Interest Rate Contracts

    $ (2,687 )    $ (1,538 )    $ (2,551 )    $ (536 ) 

Foreign Currency Contracts

      1,070        (591 )      2,795        (1,291 ) 

Other

      7        56        7        (22 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ (1,610 )    $ (2,073 )    $ 251      $ (1,849 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Net Change in Unrealized Gain (Loss)

         

Interest Rate Contracts

    $ 1,022      $ 3,087      $ 7,619      $ 1,907   

Foreign Currency Contracts

      (14,386 )      4,536        (665 )      4,266   

Credit Default Swaps

      (45 )      —          (41 )      —     

Other

      —          (21 )      —          (19 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ (13,409 )    $ 7,602      $ 6,913      $ 6,154   
  

 

 

    

 

 

    

 

 

    

 

 

  

Since the inception of the above mentioned hedge designation, Blackstone recognized a $64.2 million increase in the fair value of the hedged borrowing. This basis adjustment will be accreted using the effective interest method through August 15, 2019, the remaining term of the hedged borrowing.

As of June 30, 2012 and December 31, 2011, the Partnership had not designated any derivatives as cash flow hedges or hedges of net investments in foreign operations.